[mrchicity]

I would agree with you 99% of the time, but not for these products.

Professional fund managers who want to insure against volatility can easily trade VIX futures or index options. They wouldn't use an ETP that can only replicate daily returns which erodes longer holding period returns, with high internal fees, daily roll costs, etc.

Same goes for other products like 3x inverse leveraged oil ETPs. The Southwests and Exxon Mobils of the world would never hedge with those. They'd go to ICE/CME or have a bank/energy producer write a bespoke forward contract.

The people trading these exotic products are the /r/wallstreetbets crowd. They're basically gambling instruments because of the amped up returns. They aren't suitable for the retail investor because they can't understand the mechanics, and professionals have better choices. Really no reason for these to exist, and I wouldn't be surprised to see more scrutiny after retail traders lost everything in inverse VIX this week.

[branchless]

Agree with everything except the "I wouldn't be surprised to see more scrutiny". That would surprise me!

[mrchicity]

I think it's a case of bad optics. Most leveraged ETFs or ETFs that hold futures and constantly pay roll costs just slowly decay. They're not suitable for the average mom & pop, but holders have ample time to see their investment going poorly and get out. It's hard to feel super bad for them and they're less likely to complain loudly.

Meanwhile XIV did the complete opposite. Because of the VIX futures term structure it was actually earning roll premium most days. That plus declining volatility caused its price to march steadily upward for almost two years. It looked safe and some people put lots of money in, even bought on margin. Then one day they lost 80-90% with much of the losses in after hours trading.

It's like the difference between a company having kinda crappy management that spends too much on executive perks vs. outright fraud like Enron. Sharp moves that wipe people out completely without warning will get outsized attention.