Buy-side traders have been warned not to use exchange traded products to gain exposure to volatility over longer time horizons due to the excessive cost drag on investment portfolios.
Speaking to delegates at this year’s TradeTech Conference in Paris, Gilbert Keskin, co-head of volatility and corporate bonds at Amundi Asset Management, said the popularity of ETPs should be celebrated, but warned that traders had a responsibility to use them correctly.
He said: “[Volatility] ETPs were launched in early 2009, starting with one on the VIX index. That has been one of the most used ETPs of the past 10 years. The asset growth has been spectacular after the crisis of 2008.
“They are really interesting for providing a good hedge. But, if you are a long term investor with a medium- to long-term time horizon, you have to bear in mind the cost. There is a cost in managing this kind of ETP – It is the contango effect of this kind of future.”
Keskin said Amundi now considers the use of listed options as a way to trade ‘when everything is going nowhere’ and as the ‘main way to offer liquidity to customers’, but he warned that the cost risk from ETPs requires close monitoring by the buy-side.
He said: “If you want to protect your portfolio, you go long on volatility or if you want to enhance the yield, you go short. But if you want to manage a strategy and put [an ETP] in your portfolio for the long run, it could cost a lot.”
Keskin’s warning comes just days after a similar warning was published in the Index Investing Journal, which studied the performance of low-volatility ETFs since 2011.
The researchers concluded: “Examination of them over longer time periods shows that, overall, the long-term efficacy of low-volatility investing doesn’t stand up well to empirical evidence. While a few have managed volatility with various degrees of success, the same cannot be said of the returns delivered….”