Wall Street's fear gauge plunged more than 21% on Monday as a powerful rebound in equities helped reverse last week's market sell-off, putting exchange-traded products linked to volatility under pressure.

The Cboe Volatility Index (VIX), which measures the options market's expectations of near-term S&P 500 volatility, fell 21.23% to 20.19, according to market data shared by The Kobeissi Letter. The decline came as buying pressure returned across equities, with the S&P 500 rallying 2.3% and the Nasdaq Composite gaining 2.6%.

The sharp reversal raises questions about whether investors are unwinding defensive positions following last week's turbulence or simply responding to an improvement in near-term market sentiment.

For volatility ETF investors, the move could have significant implications. Products such as the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), ProShares VIX Short-Term Futures ETF (VIXY) and ProShares Ultra VIX Short-Term Futures ETF (UVXY) offer exposure to short-term VIX futures and can experience substantial swings as volatility expectations change.

VXX and VIXY were down about 12%, while UVXY crashed about 18% on Monday, at the time of publication.

Volatility ETFs Face a Potential Reversal

A sustained decline in volatility generally creates headwinds for funds holding VIX futures, particularly when futures prices also retreat.

The pressure could be more pronounced for leveraged products such as UVXY, which targets 1.5 times the daily performance of short-term VIX futures and resets its exposure daily.

Meanwhile, the -1x Short VIX Futures ETF (SVIX), which seeks to deliver the inverse of daily short-term VIX futures performance, could benefit if volatility continues to decline. The fund was up almost 12% during Monday's regular trading session.

There are already signs of investors repositioning. So far into November, investors withdrew $61.63 million from VIXY and $31.59 million from UVXY while adding $72.38 million to SVIX, according to ETFDb. This was despite the VIX spiking nearly 70% on Nov. 5, leading to sharp gains in VXX and VIXY. However, those flows preceded Monday's sharp VIX decline and do not establish what drove the latest move.

Is Wall Street's Fear Trade Unwinding?

The latest decline does not necessarily confirm that traders are covering short positions. It could reflect fresh equity buying, reduced demand for downside protection, changes in options positioning or a combination of these factors.

The VIX also remains above 20, suggesting that concerns about market turbulence have not entirely disappeared.

For ETF investors, the next signals to watch include VIX futures prices, trading volumes in volatility-linked products and whether the S&P 500 can sustain its rebound.

If volatility continues to compress, bullish bets on VIX-linked products could face further pressure. A renewed equity sell-off, however, could quickly revive demand for volatility exposure.