A few things to point out here: Most of these products don’t actually hold VIX futures. Most of them are exchange-traded notes.

In those cases, rather than the product holding anything, there is a simple counterparty arrangement, either with the bank issuing the ETN or an independent swap counterparty. The actual notional position those counterparties have to take is the sum of their exposure.

So, for instance, imagine that VelocityShares had just two ETNs in the market—VIIX, the short-term long VIX futures product, and XIV, its inverse. If both products had the exact same assets under management, the net exposure for Credit Suisse, the bank backing the notes, is zero. After all, for every dollar VIIX moves up within a day, XIV should go down.

Of course, because of the daily resetting that happens with the inverse and leveraged products, the likelihood of these exposures staying matched up is very small. The sole exceptions are ProShares ETFs, which actually hold the futures contracts, even the levered funds, so there’s no netting-out effect.

Still, to understand the “actual” exposures of the ETF issuers, you need to do two things. You need to net out their exposure, and you need to remember that most of these products don’t just track front-month futures. They track an index that blends first- and second-month VIX futures and shifts that allocation every single day. So here’s what that exposure looked like on Feb. 24:

A quick back-of-the-envelope calculation yields a pretty interesting set of numbers. As an industry, ETF issuers are net long over $1.5 billion of front-month exposure, and over $600 million of second-month exposure.

Since we’re constantly defending the ETF industry as being “too small to be a systemic threat,” we initially assumed this was no big deal. But then we ran the numbers on the actual open interest in VIX futures:

To be honest, our initial reaction here was “holy cow!”

For all intents and purposes, this small handful of ETFs effectively is the market for short-term VIX futures. And that’s actually more of a problem than you might even think.

Because most of the products need to rebalance daily—pro-cyclically—this means there’ll always be buyers on the days when the VIX is up, and sellers when the VIX is down. This has the effect of making VIX futures more volatile.

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