One of the most infamous trades on Wall Street is roaring back

(Bloomberg) — Forget the artificial-intelligence frenzy — the most-exciting trade on Wall Street right now might just be betting on boring.

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As winners of the AI boom like Nvidia Corp. power benchmark stock gauges to record after record, a less remarked-upon phenomenon has been unfolding at the heart of the US market: Investors are sinking vast sums into strategies whose performance hinges on enduring equity calm.

Known as short-volatility bets, they were a key factor in the stock plunge of early 2018 when they wiped out in epic fashion. Now they’re back in a different guise — and at a much, much bigger scale.

Their new form largely takes the shape of ETFs that sell options on stocks or indexes in order to juice returns. Assets in such products have almost quadrupled in two years to a record $64 billion, data compiled by Global X ETFs show. Their 2018 short-vol counterparts — a small group of funds making direct bets on expected volatility — had only about $2.1 billion before they imploded.

Shorting volatility is an investing approach that can mint reliable profits, provided the market stays tranquil. But with the trade sucking up assets and major event risks like the US presidential election on the horizon, some investors are starting to get nervous.

“The short-vol trade and its impact is the most consistent question we have gotten this year,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “Clients want to know how much of an impact it’s having on markets so they can structure their trades better. But we have seen cycles in the past like 2018 and 2020 where the short volatility trade grows until a big shock blows it up.”

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The good news for worrywarts is that the structural difference of the new funds changes the calculus — the income ETFs are generally using options on top of a long stock position, meaning that $64 billion isn’t all wagering against equity swings….