Investors are flocking to exchange-traded products to capitalize on potential stock-market volatility increases. The largest product following Cboe Volatility Index futures, Barclays iPath S&P 500 VIX Short-Term Futures ETN, has seen assets soar by over 300% this year to $1 billion. However, holding these products long-term can lead to dwindling returns due to carry costs.

These products offer significant returns if the VIX spikes, with the potential for substantial gains if timed correctly. However, the key is to buy and sell at the right moment, as holding these funds long-term can result in significant losses. Retail traders are increasingly using VIX exchange-traded products as a cautious, protective measure against market volatility.

The costs of maintaining these instruments are high, with expenses eating into potential profits. Rolling contracts daily to maintain a weighted 30-day expiration can lead to substantial losses. Implied volatility has remained restrained due to small stock market moves, impacting the value of VIX futures and ETPs. Strategies have been suggested to take advantage of contango in the futures curve, but caution is advised due to potential risks.

Investors seeking a hedge against potential portfolio losses from a stock market downturn continue to drive inflows into VIX-related funds. Hedge funds also utilize these products for short-term trading strategies. However, the complex nature of these products requires careful consideration to avoid significant losses.

Read more at Yahoo Finance: Investors Pile Into Funds Betting on Elusive Market Volatility