Not since the week ending August 24th just one month ago has the overall market ended up.  Granted, the average up category return was 3.3% this week, in contrast to the prior occasion's 4.5% average.  Though the following week brought another dramatic increase in volatility, nearly all categories have since then risen, with the exception of transports, likely due to dollar-related energy costs, and Japan, similarly due to dollar-related exporters.

    As far as top performers go, BRIC really brought it home this week, as is quite apparent on both the category- and fund-specific level.  Dollar-weighted China performance was 8.1%, with the Morgan Stanley CEF hitting 10% and the PowerShares ETF hitting 9%.  Latin America, Emerging Market, and Russia were close behind with nearly 7%, 6%, and 6% respectively. 

    The real story this week though has been inflation, and that is unfortuntately similarly apparent in these charts.  Though dollar-weighted performance puts energy, precious metals, and commodities at 5%, 4%, and 4% respectively, 6 of the top 10 best performing ETFs this week were one of these.  Given that all of the 10 worst performing CEFs are longer maturity fixed-income, it seems that these inflation concerns are causing many to dump longer horizon yield assets on real inflation-adjusted income concerns.

Dollar-Weighted Category Summary

Top CEF Week Advances and Declines

Top ETF Week Advances and Declines

    Michael Panzner did an article today about whether the S&P's gains mean anything in real dollar value, and I decided to take a quick stab at a way of visualizing this.  Therefore, I've charted here the relative performance of the streetTracks gold ETF and the S&P tracker (GLD and SPY).  This is the cumulative sum of the daily difference in log-return over the past 100 days, and as you can see, despite the S&P's impressive summer, it has still lost value relative to gold.  As an example, yesterday's post-FOMC S&P gain led to a log-return of 0.029.  After adjusting for gold as numeraire, the return is nearly halved to 0.0188.

    After closing above 20 on the 26th of July, the CBOE Volatility Index has closed above this mark since.  Only on July 27th, July 31st, and August 8th has the VIX even touched below 20 intraday.  Since August 8th, the VIX has remained entirely above this mark, with option premiums and volatility bouncing between primarily between 20 and 30.  The Volatility Index hit its peak on August 16th, touching 37.5 on runaway fears. 

Dollar-Weighted Category Summary

Top ETF and CEF Advances and Decliners

I just wanted to remind readers that I had been very interested in strange behavior in the municipal closed-end fund market over the past few months (#1, #2, #3), and had speculated that someone knew about something in the works in ETF land. 

Back on May 25th in this article on the beginning of a strange summer for these municipal funds, I said:

All in all, for BlackRock and Nuveen, this does not look to be good news.  Whether someone has caught wind of a competing ETF or whether this is purely a move on the yield, it's something to keep an eye on.

Personally, I think this is going to be the big test for ETFs. Though much of the success will be based on the underlying index chosen, new though they all might be, taming the illiquid municipal bond market will more than prove that ETF issuers are ready to displace much of the mutual fund market in my eyes.

    As this past summer has seen a long-term regime change in the systemic market volatility, discussion of the VIX and other volatility indices has picked up dramatically.  Though volatility has been an issue many times in the past, however, one thing has changed since the last period of high volatility - more and more investors expect more and more complicated products to be tradeable in easier and easier ways.  For example, the ETF market has provided a large number of products specializing in commodities, bonds, and even inverses.  None of these are assets that are impossible or sometimes even difficult to trade, but in sum, there are hundreds of ETFs and CEFs new in the past 10 years that provide nothing but access to these holdings. 

    As we discuss volatility, though, there are a number of problems.  First, although the VIX is the most understood volatility proxy, its products are by no means the most liquid.  Secondly, the VIX is designed as an theoretical price, not an asset - this is advantageous in that it is quoted in units of the underlying asset, but volatility is much more expensive and difficult to hedge than variance.   This is obvious when one compares the liquidity of the variance swap market to any VIX-related derivatives, though somewhat confusing to the an outside investor who is told that they are merely related by squaring or square-rooting.

    Having admitted that the variance swap market is very liquid, and that the two are related by such a simple mathematical operation, why then is a volatility ETF still so far away?  The problem is likely due to the fact that the reason outside investors want a volatility proxy is diametrically opposed to the safety of the ETF issuer.  When ETF investors discuss the VIX and their desire for such a product, they are not thinking of realizing the arbitrage profit between implied and future realized volatility - they're thinking of realizing a hedge against the Poisson jump part of the Merton market model.  The problem is that these larger shocks are nearly impossible to hedge against without high expenses, and given the volatility of volatility in the market presently, such losses would likely sum to a figure that would have the ETF holders even more upset than various oil commodity ETF holders earlier this year.  Add to this the fact that nearly all products are OTC markets and the asymmetry of risk for buyer and seller in any risk market and you probably have those insurance and risk analysts putting up roadblocks left and right.

    Don't get me wrong, I am all for a volatility proxy ETF myself, and have even seen hits on this site originating from various ETF issuers on the very topic of replicating the VIX, but I'm not too optimistic in the short term for a product with a safe and sustainable structure.  While I'm out on the line making predictions though, let me add this last one as a hedge - if we do see a volatility-tracking ETF in the next 2 years, expect it to come with one of the top 5 expense ratios in the market.

    As of half-way through today's trading, only 4 of 26 categories are trading to the upside, and none trading up more than 1%.  Of those categories that are currently down, utilities, real estate, and energy are seeing the worst losses. 

    The most intraday volatile categories are Russia, China, real estate, and utilities, with China the only one of these trading up. 

    Most liquid at this point are small caps, emerging markets, short, and large caps, though small caps have seen nearly three times the dollar volume as the second most liquid category.