Warning: VIX Funds Nothing Like Stocks

September 15, 2014

Be careful of your assumptions (and headlines!) about volatility ETFs.

Sometimes I read something that is so dangerous I feel like I have to write a rebuttal just so I can sleep that night. This morning’s article on Bloomberg on the VelocityShares Daily Inverse VIX Short Term ETN (XIV) is one such article.

The headline of the article, “Short Sellers Fleeing Inverse VIX Fund After 24% Rally,” is confusing enough. After which rally? Certainly not the 8 percent we’ve ground out in the S&P. No, they mean the rally in XIV itself. Let’s go to the chart for context.


The center, deeply boring line is the slow, fairly steady rally in the S&P 500 SPDR (SPY | A-98). The bottom line is the crushing horribleness of the most popular volatility ETN, the iPath S&P 500 VIX Short-Term Futures ETN (VXX |A-47). The top line is XIV.

A few things to note. As we’ve mentioned here countless times, if in fact you got the calls exactly right, to load up on VXX either in the middle of January, or at the end of July, you caught a big spike in VXX as the equity markets spooked each time. And as an XIV investor, since you were investing in the opposite bet, you suffered pretty shocking short-term losses.

Doing What You’re Supposed To Do

Both of these products are doing exactly what you’d expect them to do in the short term. The biggest difference is that while VXX continues to test Zeno’s paradox with its run to zero, XIV gets to book the contango that VXX suffers as nearly guaranteed profit, month after month. Why? Because with very rare exceptions, the market always thinks things will be more volatile tomorrow than they are today, and so the curve for VIX futures always looks like this:

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