European appetite for volatility ETFs blossoms

Inflows into volatility ETFs in Europe have spurred the launch of new products to satisfy investor interest in this asset class

Exchange-traded fund (ETF) providers are catering to persistent investor demand for volatility exposure through an ETF wrapper. “Even though equity markets have recently rallied, there is still a concern that there could be new spikes in volatility coming,” says Peter Fors, co-head at Nomura Indices Group in London.

European exchange-traded products had net inflows of €1.2 billion in March, with volatility ETFs continuing to garner new money, according to research from Lyxor.

On April 10, Source and Nomura partnered to launch the Nomura Voltage Short-Term Source ETF on the London Stock Exchange (LSE), which tracks the Nomura Voltage Strategy Short-Term 30-day USD TR Index. The fund captures volatility via the S&P 500 Vix Short-Term Futures Index, the level of exposure to which is determined by the new allocation model.

A big pick up in inflows into Nomura and Source’s earlier volatility fund, the Nomura Voltage Mid-Term Source ETF had signaled ongoing investor demand for volatility as an asset class, according to Fors. “We started the year with around $170 million in assets under management, and it’s now at $570 million.”

The new ETF attempts to provide a more reactive exposure to volatility, according to Mohamed Yangui, managing director and head of equities structuring at Nomura, by being more closely aligned to spot Vix. “European ETF holders tend to be longer term buy and hold investors, which is reflected in the lower trading turnover, so a medium-term volatility exposure embedded in an ETF is a good fit,” says Michael John Lytle, managing director at Source in London.

Earlier this month, on April 2, Source partnered with JP Morgan to launch the JP Morgan Macro Hedge Dual TR Source ETF on the LSE. This is a euro-denominated fund that takes exposure to US equity volatility by switching between long and short positions in the Vix. During times of market stress, however, it can also add up to 25% exposure to European equity volatility through VStoxx.

“More and more clients were asking us for exposure to European volatility,” says Rui Fernandes, London-based head of equity and funds derivatives structuring at JP Morgan. “The majority of the exposure is still to Vix but there is also tactical exposure to VStoxx, depending on the relative shape of the curve.”

This is the second ETF in a series: the JP Morgan Macro Hedge US TR Source ETF was launched in February and currently has around $250 million in assets under management, according to Fernandes.

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