Industry Updates

XIV was a dud, but the stock market isn't overvalued

David Tuckwell

a car with smoke coming out of it

Three ETF stories from around the web this week that we found interesting.

1) XIV: You were warned

XIV began trading after the great recession, meaning it had never been subject to extreme volatility. But there were two warnings signs all along. In 2011 when the US was downgraded by S&P, XIV lost 71% of its value in two weeks. And again in 2015 during the flash crash it lost 65% of its value. Remarkably, Credit Suisse even warned investors that its value could fall to zero during extreme volatility.

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2) Stock market valuations should be higher

The stock market is highly valued by historical standards - but it's not overvalued. The stock market has changed in many ways that justify higher valuations. Risk is lower, thanks to government intervention, educational resources and internet-enabled transparency. Commissions are down thanks to ETFs and index funds, ensuring more gains go to investors, not middlemen. Accounting standards have become stricter, meaning that what once counted as goodwill assets no longer do.

Today's higher stock market valuations reflect these changes.

3) XIV: hedge fund makes 8,600% on shorting XIV

A Colorado hedge fund made $17.5 million on a $200,000 bet that XIV would tank. The company thought that the ETN would become worthless when trading got too volatile, then went shopping for the right derivative to do it with.

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