VIX and More

• The Year in VIX and Volatility (2016)
• The 2016 VIX Futures Term Structure: Extraordinarily Average
• My Low Volatility Prediction for 2016: Both Idiocy and Genius
• Every Single VIX ETP (Long and Short) Lost Money in 2015
• Performance of VIX ETPs in 2013
• Performance of VIX ETPs During the Recent Debt Ceiling Crisis
• VIX ETP Performance in 2012
• Expanded Performance of Volatility-Hedged and Related ETPs
• Performance of Volatility-Hedged ETPs
• Performance of VIX ETP Hedges in Current Selloff
• Comparing SPLV and VQT
• ZIV Undeservedly Neglected
• Will TVIX Go To Zero?
• Four Key Drivers of the Price of TVIX
• Credit Suisse Suspends Creation Units in TVIX: What It Means
• TVIX Creation Units Return: What It Means for Investors
• All About UVXY
• The Case for VQT
• Slicing and Dicing all 31 Flavors of the VIX ETPs
• Charting the Assets of the Volatility-Based ETPs
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• First Day of Trading in VXX and VXZ a Success

When I recently assembled Top Posts of 2013 (Through First Half of Year), several themes jumped off the page. The top four posts of the year summarize what many investors have been worrying about this year:

1. The Low Volatility Story in Pictures
2. Four Years of SPX Pullbacks in One Plot
3. VIX ETP Performance in 2012
4. All-Time VIX Spike #11 (and a treasure trove of VIX spike data)

The issues are related to pullbacks in stocks, the VIX spikes associated with them, how to minimize portfolio volatility when these types of events happen and what the implications are for various VIX exchange-traded products.

With that backdrop and a stock market that has been looking fatigued while it has meandered sideways for the past month, quite a few investors are thinking about how to hedge a portfolio that has a long-equity bias. In the graphic below, I capture the recent performance of a number of ETPs which may be suitable for hedging that type of portfolio.

[source(s): StockCharts.com]

Interestingly, the performance of these securities appears to fall into three distinct groups.

The top group has two ETPs:

• SPY (black line), included largely for reference purposes
• Direxion S&P 500 RC Volatility Response Shares (VSPY), which employs a market timing mechanism that dynamically allocates between stocks and bonds according to measures of market volatility (blue-green line)

The second group contains the core of the VIX-based dynamic hedging products:

• First Trust CBOE S&P 500 Tail Hedge Fund ETF (VIXH), which is essentially a portfolio consisting of 99-100% of SPY, augmented by a dynamic allocation of 0-1% of VIX options (light green line)
• Barclays ETN+ S&P VEQTOR ETN (VQT), which has a dynamic allocation of VIX futures that fluctuates based on realized volatility and the trend in implied volatility (red line)
• PowerShares S&P 500Downside Hedged Portfolio (PHDG), like VQT, has a dynamic allocation of VIX futures and is based on the S&P 500 Dynamic VEQTOR Index (dark purple line)

The bottom group includes two performers:

• UBS ETRACS Daily Long-Short VIX ETN (XVIX), which is equivalent to a fixed allocation of a 100% long position in VXZ, offset by a 50% short position in VXX. I have included XVIX (aqua blue line) here largely to show how closely the performance corresponds to that of XVZ
• iPath S&P 500 Dynamic VIX ETN (XVZ), utilizes the slope of the VIX:VXV ratio (SPX 30-day implied volatility to SPX 93-day implied volatility) to determine the dynamic allocation to short-term and medium-term VIX futures. In this case, the allocation to short-term VIX futures (think VXX) can be either long or short, while the allocation to medium-term VIX futures will always be long, though it is variable (fuchsia line)

Keep in mind that the most aggressive hedges are almost always the ones that underperform the most in bullish periods. If you want a very different look at how some of these products perform when stocks decline sharply, check out Performance of VIX ETP Hedges in Current Selloff.

The links below provide some background information on some of these products as well as performance data and should serve as excellent starting points for more comprehensive research.

Related posts:

• VIX ETP Performance in 2012
• Dynamic VIX ETPS as Long-Term Hedges
• Performance of Volatility-Hedged ETPs
• Performance of VIX ETP Hedges in Current Selloff
• Comparing SPLV and VQT
• Three New Risk Control ETFs from Direxion
• Cheating with Partial Hedges
• How to Insure Your Stock Portfolio (Barron’s)
• Why Not Point Hedges?
• Investing with a Target Volatility Approach

Disclosure(s): long VQT and short VXX at time of writing

Back in my consulting days, I convinced myself that there were rare instances when an ugly chart crammed full of data should take precedence over a clean and simple graphic that focused on the key takeaways. For my purposes at least, the graphic below, while unlikely to garner accolades from the likes of Information Aesthetics of Flowing Data, is one of those instances and suits my purposes perfectly. [After all, this blog is really just a place for me to archive my own idiosyncratic ideas and the two million interlopers are just a curious side effect, but I digress…]

Getting back to the main point, the graphic below updates the VIX exchange-traded products (ETP) landscape (the only additions are two new red 0s to indicate that UVXY and SVXY are now optionable) and adds performance data for the first quarter of 2012.

Of course anyone who has checked in on this space periodically certainly has already realized that the first quarter saw record contango and negative roll yield across the full spectrum of the VIX futures term structure. As a result of this, the long volatility products had a horrendous three months, the inverse ETPs racked up huge gains and those products with dynamic allocations (VQT and XVZ) or offsetting long and short volatility legs (XVIX) were able to manage small(er) gains.

Following the usual pattern, the products with the shortest target maturities were the most volatile, while those with longer target maturities saw much less movement.

Also notice the symmetry of the return structure. For all the long products that were getting whacked (TVIX, UVXY, VXX, TVIZ, etc.) there were corresponding inverse products (XIV, SVXY, ZIV, etc.) that were racking up larger gains than the losses suffered by their long volatility counterparts.

Last but not least, perhaps the distribution of the returns will help to explain why I have organized my previous VIX ETP ‘field guides’ in this fashion.

This graphic should implicitly raise a bunch of issues and the links below are good jumping off points for further exploration regarding a number of those issues.

For the time being I will leave additional analysis to those in the comments section.

Related posts:

• VIX Exchange-Traded Products: The Year in Review, 2011
• VXX, VXZ, XIV and ZIV During Eleven Months of a Sideways VIX
• A Monthly Comparison of VXX and VXZ
• Options on UVXY and SVXY Open Up New VIX ETP Trading Approaches
• Dynamic VIX ETPs as Long-Term Hedges
• ETRACS Volatility ETPs
• Four Key Drivers of the Price of TVIX
• Will TVIX Go to Zero?

Disclosure(s): long XIV, ZIV, BBVX and XVZ; short TVIX, UXY and VXX at time of writing

With the sudden success of TVIX, it seems as if the entire VIX exchange-traded product (ETP) space has a large number of new converts. Growing from just two products at the end of 2009 (VXX and VXZ) to 12 by the end of 2010 and 31 by the end of 2011, VIX ETPs are a growth industry.

For those who trade or invest in the VIX ETP space, I thought the graphic below – a field guide of sorts – might be of assistance. The intent of the graphic is to differentiate between the various VIX and volatility-based ETPs primarily by mapping them according to target duration and leverage. The key at the bottom of the graphic highlights some additional distinctions, such as:

• ETPs that hold some non-VIX securities in their portfolio are marked by a black triangle. These include VQT and CVOL, which hold long or short positions in SPX/SPY
• ETPs that include both long and short VIX positions in their portfolio (VQT, XVZ and XVIX) are flagged with a red/green rectangle
• ETPs with a dotted outline (VQT and XVZ) have a rule-based dynamic allocation of volatility components
• the red ovals highlight those five VIX ETPs that are currently optionable
• the large light red shaded area incorporates all the ETPs that use 2x leverage (there are no 3x VIX ETPs)
• the large orange shaded area incorporates all the ETPs which have a target average weighted one month duration and thus are particularly susceptible to the influence of contango and negative roll yield in the VIX futures portion of their holdings

There are some other important distinctions that are difficult to work into the chart, but one I did incorporate was to flag VIX ETFs (from ProShares) in a black font, while all the ETNs are in a blue font.

For the sake of completeness, I also included a necrology of the two VIX ETPs that were closed last year. Interestingly, both were immediately succeeded with virtually identical products that trade under a similar ticker.

Going forward I fear that the next round of VIX ETPs may make it impossible to capture the same level of detail as I have done in this single page, but for now at least, this is my reference of choice for VIX ETPs.

Related posts:

• VIX Exchange-Traded Products: The Year in Review, 2011
• Four Key Drivers of the Price of TVIX
• Slicing and Dicing All 31 Flavors of the VIX ETPs
• Now Sixteen Volatility ETPs, Four of Which Are Optionable
• Two More VIX ETNs Make it a Baker’s Dozen
• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products
• The Evolving VIX ETN Landscape
• Interesting New Leveraged Volatility ETN Coming from Citi
• Shorting VXX and Long XXV or XIV
• Charting the Assets of Volatility-Based ETPs

Disclosure(s): long XVZ, short VXX and short TVIX at time of writing

Earlier this week, OptionPundit published the transcript of a recent interview: Bill Luby Talks to OptionPundit.

The interview touches on a wide range of subject, but with an emphasis on the VIX and VIX-based ETPs, such as VXX, VXZ, XVIX. As always, VIX futures and the VIX futures term structure are a critical part of this discussion.

Related posts:

• Transcript from Interview with Charles Kirk Now Available
• Appearance on The Option Block
• On Abnormal Returns TV with Tadas Viskanta
• The Education of a Trader

Disclosure(s): long VXZ and short VXX at time of writing

Of all the second generation volatility-based exchange-traded products that have been launched in the past few months, the one I find most intriguing is the UBS E-TRACS Daily Long-Short VIX ETN, which I prefer to refer to by its ticker symbol XVIX.

XVIX combines a 100% long position in the S&P 500 VIX Mid-Term Futures Excess Return Index with a 50% short position in the S&P 500 VIX Short-Term Futures Excess Return Index. It is therefore the functional equivalent of a position consisting of two units long VXZ and one unit short VXX. This combined long-short position nets out with very little exposure to volatility in most market conditions. Instead, XVIX is almost entirely a VIX futures term structure/contango play that increases in value when the slope of the VIX futures term structure is upward and/or getting steeper. On the other hand, XVIX comes under the most pressure when the slope of the VIX futures term structure is flattening or becoming downward sloping (i.e., entering into backwardation.)

While I was on a hiatus, Volatility Futures & Options put XVIX under a microscope in De-constructing XVIX and explored the historical data and the appeal of the 2:1 long-short ratio vis-à-vis a number of alternative ratios.

As I see it, XVIX is almost a pure play on the VIX futures term structure. The historical data provided by UBS and analyzed in some detail by Volatility Futures & Options shows annual returns in the 10-25% range prior to 2010, with a maximum drawdown in the 10-15% range. Last year has to be considered an outlier, as the mean daily contango as calculated by my proprietary VIX Futures Contango Index was 79, a huge premium over the lifetime average reading of 50 for this index. Not only was contango extreme in 2010, but it was also increasing for the majority of the year.

The bottom line is that 2010’s performance (up 55%, with a 5% maximum drawdown) in XVIX is not likely to be repeated any time soon. Over the long term, I expect XVIX to revert to annual returns in the 10-25% range. In the short-term, however, there may be some more significant bumps in the road as the VIX futures term structure unwinds some of its extreme contango and returns to a more consistently flat term structure.

Related posts:

• Now Sixteen Volatility ETPs, Four of Which Are Optionable
• Two More VIX ETNs Make it a Baker’s Dozen
• VIX and More and the 2011 Bespoke Roundtable
• Ways to Turn Volatility into an Asset Class (Barron's)
• VIX Futures Contango Soars
• VIX Futures: What Were/Are They Thinking?
• VIX Sets Two New Records
• Shorting VXX and Long XXV or XIV

The graphic below is part of my ongoing effort not only to maintain a list of all the volatility-based exchange-traded products, but present them in a manner which helps to highlight the distinctions among these products.
Since I last updated this picture, in early December, three new VIX-based ETPs have entered the fold. Two of these are the first VIX-based ETFs and also represent the first products in this space from industry heavyweight and leveraged/inverse ETF heavyweight ProShares:

• ProShares VIX Short-Term Futures (VIXY)
• ProShares VIX Mid-Term Futures (VIXM)

As the chart below shows, VIXY enters the already-crowded space of VIX-based ETPs targeting VIX futures with one month maturity, while VIXM is aimed at the five month maturity space. ProShares undoubtedly hopes that by differentiating its products as ETFs rather than ETNs, the absence of credit risk associated with ETNs will resonate with investors. I have highlighted this distinction by using black italics for the ticker symbol of both ETFs.

ProShares has also been fortunate in that as of this week options are now being offered on VIXY and VIXM, making these only the third and fourth optionable volatility-based ETPs, following in the footsteps of VXX and VXZ. Note that all four optionable ETPs have a red O preceding their ticker.

The third new product to be launched in the past month is the iPath Inverse January 2021 S&P 500 VIX Short-Term Futures ETN, which trades under the ticker IVO. The launch of this ETN apparently confused some observers, but is likely an attempt by Barclays to come up with an ETF that does a better job of tracking the inverse of VXX. My concern is that over time IVOs ability to mirror changes in VXX will undergo the same dilution that happened to XXV. It is possible that Barclays will periodically trot out newer versions of XXV and IVO, but until then, I see these two products as performing more like a fractional inverse ETN than XIV. For this reason, I have put XXV and IVO in separate boxes in the one month -1x space to reflect this important distinction (see Shorting VXX and Long XXV or XIV for more details.)


With sixteen volatility-based ETPs available for trading and options on four of those, it is not an exaggeration to say that the number of possible volatility strategies and trades is limited only by the imagination.

Related posts:

• Two More VIX ETNs Make it a Baker’s Dozen
• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products
• The Evolving VIX ETN Landscape
• Interesting New Leveraged Volatility ETN Coming from Citi
• Shorting VXX and Long XXV or XIV
• Ways to Turn Volatility into an Asset Class (Barron's)

The last few times I have been asked to be a guest columnist for The Striking Price on behalf of Steven Sears at Barron’s, there has been a spike in volatility just about the time I go to commit my thoughts to paper keyboard + monitor. I had begun to think that the folks at Barron’s were somehow omniscient and knew when to put in a call to the bullpen for “that volatility guy.”

So when the call came again, I immediately had a Pavlovian urge to buy up some VIX calls, but alas the markets have been calm. Everyone seems to be wondering where the pullback is. If today’s column is not the catalyst, I’m not sure what it will take.

Speaking of which, I have elected to focus on volatility as an asset class for today’s guest column, which bears the title, Ways to Turn Volatility into an Asset Class. Part of my thesis is that 2011 is the year that volatility goes mainstream, largely due to the rise of volatility-based exchange-traded products, which are in the process of bringing volatility trading to the masses. I also repeat an earlier assertion that before the year is over, XVIX and XIV will gain significant traction as buy and hold volatility vehicles. For all the details, click through to read the original.

…and if we do see a major pullback soon, I expect the timetable to accelerate for investors to begin to embrace the stable of 15 volatility-based ETPs.

Related posts:

• The Year in VIX and Volatility (2010)
• VIX and More and the 2011 Bespoke Roundtable
• Volatility as an Asset Class I
• VelocityShares Jumping in to the VIX ETP Space with Leveraged and Inverse Products
• Two More VIX ETNs Make It a Baker’s Dozen

A full list of my Barron’s contributions:

• Ways to Turn Volatility into an Asset Class (January 12, 2011)
• There’s Opportunity in Uncertainty (November 18, 2010)
• Will Market Volatility Return to Crisis Levels (September 15, 2010)
• The Perils of Predicting Volatility (May 20, 2010)
• Take a Longer View on Volatility (July 2, 2009)

For the second year in a row, I have elected to stick my neck out and make my best guess at what the investment world will look like in the coming year in conjunction with the Bespoke Investment Group’s second annual roundtable.

As someone who has a tendency to focus almost all of my predictive powers on the next two options expiration cycles, I find that forcing myself to think in terms of a one year time horizon is a daunting task. Still, just going through the process and committing some ideas to paper makes this exercise worthwhile and fun.

Frankly, I was surprised by how accurate many of my predictions from last year turned out to be and for better or (more likely) for worse, this has emboldened me to be even more provocative and more specific this year, including some outrageous comments about AAPL.

More to the main theme of this blog, I think readers may find the following predictions for 2011 to be of interest:

“2011 will mark the rise of volatility as an asset class.  Part of the reason for this rise will be the runaway success of VIX-based ETNs and ETFs, notably the recently launched XIV, which will prove that volatility vehicles can be good buy-and-hold investments.  XVIX will also prove to be a popular and successful buy-and-hold ETN and once liquidity improves, TVIX will hit a tipping point and become the darling of day traders.”

All in all, a dozen top bloggers offered up their predictions for 2011. Bespoke has assembled some of the highlights from the responses here.

Additionally, there is a to the the full text of my replies to all 34 questions about 2011 here.

For those financial anthropologists in the crowd, the highlights for the 2010 roundtable are here and my archived predictions for 2010 are here.

[12/19/10 Update:  note that there were several incorrect links to Bespoke that have since been corrected ]

Related posts:

• VIX and More and the 2010 Bespoke Roundtable

Disclosure(s): long XIV and XVIX at time of writing

In addition to the six new VIX-based ETNs launched yesterday by VelocityShares, two new VIX-based ETNs also traded yesterday for the first time.

Barclays added VZZ to their product lineup, bringing the total number of Barclays products in the space to five. VZZ is essentially a +2x version of VXZ, with a target maturity of five months.  VZZ is the first leveraged volatility ETN from Barclays and is interesting in that the absence of a corresponding +2x VXX product suggests Barclays does not see the need for a leveraged VXX equivalent or perhaps finds the combination of leverage and high contango at the front end of the VIX futures term structure to be a daunting combination.

Elsewhere, UBS makes its entry into the VIX-based ETN fray with a huge splash. Their new product, XVIX, ups the innovation ante by combining a 100% long position in the S&P 500 VIX Mid-Term Futures Excess Return Index with a 50% short position in the S&P 500 VIX Short-Term Futures Excess Return Index. Translated into Barclays terms, this would be roughly the equivalent of two units long VXZ and one unit short VXX. Depending upon the shape of the VIX futures term structure, UBS is hoping that XVIX will benefit from contango and also get a lift from an increase in volatility. The performance of XVIX going forward will be particularly interesting to watch.

I would expect the land grab in the volatility ETP space to settle down for a little while as investors evaluate the new menu of options.  In the meantime the chart below should help.  I have grayed out those products which have been announced, but not launched.

The most difficult part may be unlearning Roman numerals in the process. I’m sure on some trading floor, however, some joker is yelling out, “I’m long 25 and 15, but short 70.”

Related posts:

• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products
• The Evolving VIX ETN Landscape
• Interesting New Leveraged Volatility ETN Coming from Citi