(Bloomberg) — Seeing the Cboe Volatility Index finally close below 20 may have settled the nerves of the most anxious investors Friday. But a look at futures and exchange-traded fund flows suggests the all-clear hasn’t been sounded just yet.The spread between four-month contracts on the so-called fear gauge and front-month ones — a measure of expected price swings in the medium term — remains above its 10-year average, and demand for volatility-tracking funds is soaring. That suggests some traders are betting volatility may quickly return amid concerns about stretched valuations and signs of froth in risk assets.“While we are seeing a lot of volatility selling on the equity level, a few of the more notable VIX trades may indicate a view VIX will remain” in the 20s for the next few months, wrote Susquehanna International Group strategist Chris Murphy in a note Friday. “These investors might believe that VIX would remain elevated in both a continued upside scenario (as investors continue to buy call options to participate) or a downward scenario.”A grind higher in U.S. stocks to fresh records last week helped the VIX finish Friday’s session down 6% to 19.97, the first sub-20 close since the pandemic rout took hold a year ago. Traders had been focusing on that level for some time as an indicator markets were back to “normal.”But at the same time volatility was falling, bets on its return — via a leveraged ETF that tracks volatility futures — were soaring. Investors poured over $850 million into the ProShares Ultra VIX Short-Term Futures ETF last week, and the number of its shares outstanding has surged to a record.The World’s Biggest Volatility ETF Grows 40% in Just Four DaysThe inflows have caught the attention of Tallbacken Capital Advisors LLC CEO Michael Purves, who noted the ETF’s growing appearance on social media platforms like Reddit’s WallStreetBets. Retail investors could be using it as way to hedge a potential downturn in stocks, he wrote in a note Friday.“There are certainly some parts of the WSB community which are focused on a major market selloff — an understandable concern any investor would have after such a sustained rally,” Purves wrote. “Whether the investors buying into this levered product will be vindicated remains to be determined.”Futures on the S&P 500 Index were up about 0.5% from Friday, sitting near record levels around 3,950 as of 7 a.m. Tuesday morning in Hong Kong.Professional investors continue to bet on volatility’s decline. Non-commercial net-short positions on futures linked to the VIX are at their largest in over a year, according to the latest data from the Commodity Futures Trading Commission.And for Dean Curnutt, CEO of Macro Risk Advisors, the higher levels of volatility priced into longer-dated futures contracts could just be signs of a “disconnect.”“While this market trades as if it is fragile, overvalued and even casino-like, I think there are option trades to do to fade these inflated volatility levels,” he wrote in a recent note.(Updates stock futures moves)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.