Understanding Volatility ETFs Isn't As Easy As Watching The VIX
Mar 29, 2016 @ 09:15 AM
by peter Tchir,
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.
http://www.forbes.com/sites/petertchir/2016/03/29/understanding-leveraged-vix-etfs/?utm_campaign=yahootix&partner=yahootix#23258454327
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More Rough Days Ahead for Volatility Products?
By
Ben Eisen
Mar 30, 2016 9:44 am ET
Exchange-traded products used to bet on volatility are falling even more Wednesday after a rough Tuesday.
The CBOE Volatility Index, dubbed Wall Street’s “fear gauge,” fell 9.3% to 13.82 Tuesday after Federal Reserve Chairwoman Janet Yellen highlighted risks to the global economy. Leveraged products which gain when the VIX rises have been particularly popular in recent weeks, helping spur record bets using volatility-linked products. But Tuesday’s VIX slide helped push the VelocityShares Daily 2x VIX Short-Term ETN down 9.5% and the ProShares Ultra VIX Short-Term Futures 12% lower.
And both products opened more than 3% lower on Wednesday.
If money flows out of these products, that could hamper performance further, according to Peter Tchir, head of macro strategy at Brean Capital LLC.
“I am looking for a large unwinding of these ‘hedges’ which will cause selling of VIX futures,” he said in a note.
The products own or track a mixture of futures contacts tied to the VIX.
This post is from our Market Talk stream. Market Talk, a feature of Dow Jones Newswires, provides real-time analysis of breaking news, as well as running commentary on financial market activity.
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(Editorial comment: so as we can see Davy the VXX and UVXY do have the premium erosion component. )
is the market close to an inflection point? or is it another 5 weeks away.... we'll know more by the end of the day.)
JP |
