Product Confusion: Why Retail Investors Lose Money in VIX ETPs

Behavioral finance has studied why retail investors lose money. We discussed one such study in a previous post. Retail investor losses can be attributed to, among other factors, overconfidence, overtrading, sensation seeking, issuers’ overpricing, etc.

Reference [1] observed that in the VIX ETP space, retail investors experienced an annualized return of -11.09%. The study investigates why investors lose money and proposes a new behavioral factor contributing to these losses: product confusion.

Specifically, retail investors mistakenly believe that VIX ETPs allow them to trade the VIX index directly. However, the VIX index is non-tradable, and VIX ETPs are actually linked to a VIX futures index, not the VIX index itself.

The authors pointed out,

As evidenced by the negative aggregate dollar profits from retail trading, I show that retail investors, in aggregate, incur losses in the VIX ETP market. With negative risk-adjusted returns on retail investors’ VIX ETP portfolio in normal and leveraged products, my results also suggest that the use of VIX ETPs as a means to acquire protection against surges in market volatility or stock market downturns appears to be insufficient in explaining losses. Instead, I show that retail trading would not be characterized by losses and poor selection and market timing if the VIX ETPs do in fact track the leverage-scaled VIX index. If retail investors trade VIX ETPs attempting to exploit the mean-reverting behavior or other predictable patterns of VIX, these trades would generally not be profitable since such predictable future movements of VIX are already priced in the VIX futures market and thereby in the VIX ETP market. Hence, these results are consistent with product confusion where retail investors believe that they buy and sell the VIX index when trading VIX ETPs. Although there may exist theoretical justifications in terms of diversification and hedging benefits to provide retail investors with access to the VIX ETP market, my findings indicate that, in aggregate, their ability to extract value from the products is limited and that retail investor sophistication is a potential cause of this.

This represents an interesting contribution to the literature on retail investor behavior.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Christine Bangsgaard, Retail investors and product confusion: The case of VIX investments, Behavioural Finance Working Group 18th International Conference, 2025