Volatility ETFs Often Own All VIX Futures

By
Dave Nadig and Gene Koyfman
March 01, 2012
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Does this matter for investors?

When TVIX halted creations last week, it caused a lot of people to look at this tiny little corner of the ETF market.

With just 14 products and a bit more than $2.5 billion in assets, it’s easy to dismiss it. In fact, on these very pages, we’ve been quoted talking about how the VIX products are largely irrelevant for most investors.

We stand by that assessment. VIX—an index of the implied volatility in the S&P 500 options market—is a curious beast. It isn’t the actual volatility of the S&P 500; that’s a number that’s easy to calculate.

At the time of this writing, the trailing 30-day volatility of the S&P 500 was 8.58 percent. What that actually means is that 66 percent of S&P 500 returns for a one-year period should fall between +/- 8.58 percent of a mean return.

It’s something of a goofy figure to start with—annualizing a short-term reading on volatility can lead to wildly unbelievable numbers. If you did it on two days’ worth of returns, you could end up with volatility numbers that have never actually been realized by the market, even in its best and worst years.

Still, it’s a measurement that makes sense in relative terms: It is rational to say that an index with a volatility reading of 10 percent is twice as volatile as a different index, measured the same way, with a volatility reading of 5 percent.

Then there’s VIX. VIX, rather than being any measurement of real volatility, is a measurement of the expected volatility in the S&P 500, as implied by a strip of S&P 500 options.

That VIX isn’t a particularly useful measure of volatility is something we’ve ranted about before. But that’s actually a bit beside the point.

Wall Street, always on the lookout for a new way to burn up money, has fallen in love with the VIX, and in particular, with VIX futures and ETFs. About $2.6 billion in short-term volatility-based ETFs is nothing to sneeze at.

The headlines have focused tightly on these products in recent weeks, as the second-largest product in the space, the VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX), halted creations. This led to innumerable articles in the mainstream press asking a simple question: Why?

The answer, it turns out, is that any rational investor would look at the VIX futures market and run away screaming.

Let’s get some numbers on the table. As of a few days ago, here’s what the short-term VIX ETF market looked like:

Ticker

Fund

Issuer

AUM

(2/24/12)

Leverage

Factor

IVOP

iPath Inverse January 2021 S&P 500 VIX Short-Term Futures ETN

Barclays Capital

6,927,500

-1

VXX

iPath S&P 500 VIX Short-Term Futures ETN

Barclays Capital

1,208,161,500

1

XVZ

iPath S&P Dynamic VIX ETN

Barclays Capital

189,261,600

1

XXV

iPath Inverse S&P 500 VIX Short-Term Futures ETN

Barclays Capital

15,705,000

-1

SVXY

ProShares Short VIX Short-Term Futures

ProShares

14,042,000

-1

UVXY

ProShares Ultra VIX Short-Term Futures

ProShares

68,926,000

2

VIXY

ProShares VIX Short-Term

ProShares

81,564,300

1

AAVX

ETRACS Daily Short 1-Month S&P 500 VIX Futures ETN

UBS

11,515,000

-1

BBVX

ETRACS Daily Short 2-Month S&P 500 VIX Futures ETN

UBS

11,584,000

-1

VXAA

ETRACS 1-Month S&P 500 VIX Futures ETN

UBS

6,063,000

1

VXBB

ETRACS 2-Month S&P 500 VIX Futures ETN

UBS

6,998,000

1

TVIX

VelocityShares Daily 2X VIX Short Term ETN

VelocityShares

613,243,200

2

VIIX

VelocityShares VIX Short Term ETN

VelocityShares

21,672,000

1

XIV

VelocityShares Daily Inverse VIX Short Term ETN

VelocityShares

416,172,000

-1

 

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