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The VIX Keeps Acting Like the…VIX

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The CBOE S&P 500 Volatility Index (VIX) is one heck of a volatile beast. Did I just use the word “volatile” to describe a “volatility” index? Shame on me for not being more creative with my words!

To bring you up to speed, here’s what’s happened: the recent behavior of the VIX and ETFs tracking it is giving the rollercoaster business a run for its money.

After the VIX skyrocketed a breathtaking 217% from Aug. 15 to Aug. 24, bullish VIX-linked products like the ProShares Short-Term VIX Futures ETF (VIXY) and ProShares Ultra 2x Daily VIX Short-Term Futures ETF (UVXY) followed with impressive gains of 52% and 121% respectively.

One month after the Aug. 24 stock market selloff, the VIX was still up 82% and holding. Likewise, the performance of VIXY and UVXY were both still up a sizzling 52% and 98%.

But heading into early October, the VIX suddenly remembered it was a volatlity index and decided it was time to behave in a way — true to its name “volatile” — by doing something radically unexpected: crash back to Earth.

Instead of being up 217% or 82% or even 50%, the VIX as of early Oct. was up a completely unimpressive and not very frigtening 33%. Similarly, while VIXY along with UVXY were up 32% and 47% from their mid-August levels, both funds were dramatically lower compared to previous nosebleed levels.

Why does it matter?

Because the erratic nature of the VIX is a stark reminder that volatility is a non-core asset class which, if you’re going to own, only belongs in once place within an investor’s portfolio — the non-core part of the portfolio. Or, as I like to say, the volatIlity of volatility can be a whole lot of volatility.

The direct and explicit translation of what I’m trying to say is that volatility and VIX based ETFs should play a minor role within an investor’s portfolio and not a single iota more. It also means the next time you’re lucky enough to bang out a 121% gain within a one-week period, you better take the gain.