XVIX At Six Months

June 27, 2011

 

But XVIX is much more compelling in the correlations department. I used the SPDR S&P 500 ETF (NYSEArca: SPY) and the iShares Barclays Aggregate Bond Fund (NYSEArca: AGG) as proxies for equity and bond markets. XVIX beats the others here, especially versus equities.

XVIX correlation

XVIX also delivered near-zero correlation with the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX), the proxy I used for the VIX itself. I view this as a good thing: This product is all about term structure, not the underlying.

Here are a few other quick points on XVIX. First, it charges 0.85 percent. That’s not cheap, but it’s comparable to GTAA’s 0.90 percent, DBV’s 0.75 percent and RALS 0.95 percent.

Next, XVIX holders face uncertain tax treatment. The best case is long-term capital gains upon a sale, but being taxed at ordinary-income rates and other outcomes are possible when you sell. (By the way, XVIX is far from unique in this respect.)

Third, XVIX uses an ETN structure, so you face counterparty risk from the issuer, UBS. In other words, if UBS were to go bankrupt, XVIX holders would be left holding the bag. Also, XVIX produces no current income.

Last, consider using a limit order rather than a market order because this is a thinly traded fund and limit orders are the best way to get a price approximating fair value.

XVIX comparison

The bottom line is this: XVIX’s low correlation with equities and bonds validates the “absolute” part of its absolute returns goal. Now it just needs to ratchet up the returns part of the deal.

 

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