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Understanding Volatility ETFs Isn't As Easy As Watching The VIX

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This article is more than 7 years old.

I wrote about the inflows into (TVIX) VelocityShares Daily 2x VIX Short-Term ETN this weekend.  The inflows into $900 million (UVXY) ProShares Ultra VIX Short-Term Futures ETF  have been even greater than that in the past month.

With such large inflows, it is worth examining these ETN's and ETF's more closely.

Here is what happened yesterday, March 28th (all pricing and data sourced via Bloomberg).

Product 3/28 Price 3/25 Price % Change
VIX Index  15.24 14.74 3.4%
VXX ETN  19.05 19.30 -1.3%
 TVIX ETN  5.08 5.21 -2.5%
 UVXY ETF  22.73 23.33  -2.6%
 SPVXSP Index  445.22 451.91 -1.5%

Yesterday the VIX index increased slightly, yet (VXX) iPath S&P 500 VIX Short-Term Futures ETN, TVIX and UVXY all declined.

That is because all three of the exchange traded products track a variation of the S&P 500 VIX Short-Term Futures Index (which I have as SPVXSP).

This index is defined as the return from a daily rolling long position in the first and second month VIX futures contracts traded on the CBOE.  Currently those are the April 16 and May 16 contract, both of which declined on Monday - diverging from the more publicized VIX index.

This is the chart of this index going back to 2010.  It helps explain why each of the exchange traded products has had to undergo multiple reverse splits.

That isn't to say that this index can't go up, it has had some strong moves to the upside in the past year, which, if it occurs again would greatly benefit holders of the various exchange traded products linked to it.

So while the index and the exchanged traded products could do well if volatility spikes, it is more complicated than just following the VIX index.

The exchange traded products face three hurdles (all of which can be overcome, but are hurdles)

  • For the leveraged products, the daily re-balancing tends to have a drag on returns and creates a "path dependent" return profile, where the value of the exchange traded fund is dependent on not just the index level on the day bought and sold, but on the path the index took to get there
  • Recently the products were trading at a premium to NAV which is another impediment to rallying
  • The VIX futures contracts have a reasonably steep curve - with April at 17.36, May at 18.87, and Jun at 19.65 (at the time of this writing) - so all else being equal, the index has this "roll down the curve" effect to deal with - a common concern for many products linked to futures with steep curves.

This rush into "VIX" related products could work as we could see another spike in volatility like we had in August 2015 or February 2016, but the returns will not be as simple as watching VIX.

Disclaimer: The content provided is property of Peter Tchir and any views or opinions expressed herein are those solely of Peter Tchir. This information is for educational and/or entertainment purposes only, so use this information at your own risk. Peter Tchir is not a broker-dealer, legal advisor, tax advisor, accounting advisor or investment advisor of any kind, and does not recommend or advise on the suitability of any trade or investment, nor provide legal, tax or any other investment advice.