XVIX At Six Months

June 27, 2011

Volatility play? Contango killer? Hedging Tool? It’s none of the above.

The UBS E-TRACS Daily Long-Short VIX ETN (NYSEArca: XVIX) aims to harvest persistent inefficiencies in the VIX futures curve. Specifically, XVIX provides 100 percent long exposure to midterm VIX futures and 50 percent short exposure to short-term VIX futures. Midterm and short-term means five-month and one-month weighted average exposure, respectively.

The ETN’s index resets daily. In general, the ETN will make money when the midterm futures outperform the front-month futures, consistent with the 100 percent long and 50 percent short exposure scheme. Stated plainly, XVIX is designed to profit on the term structure of VIX volatility futures, and not from volatility in equities.

XVIX just passed the six-month mark, so this seems like a good time to take a peek at how it’s fared. But what’s a good benchmark? The ETN’s website provides helpful information on short-term and midterm VIX futures, the VIX Volatility Index itself and on the S&P 500. While these ingredients definitely fall into the stew of underlying exposures, they provide little insight into performance analysis.

Let’s back up to think about the goals of the fund. Key feature No. 1 from the fund’s fact sheet is: “Capitalize on steepness of short end of VIX futures curve.” That’s absolutely true, but I’m looking for clues as to how this ETN is used in a portfolio.

Key Feature No. 2: “Historically uncorrelated to stock market returns.” Bingo. Like many other ETF and ETN products, XVIX aims for absolute returns. So let’s compare it with other funds that might play a similar role in a portfolio: the Cambria Global Tactical ETF (NYSEArca: GTAA), the PowerShares DB G10 Currency Harvest (NYSEArca: DBV) and the ProShares RAFI Long/Short ETF (NYSEArca: RALS).

The ETN’s six-month returns place third out of these four funds. Its daily volatility for the period, as measured by standard deviation, is a bit better: second place out of the four.

XVIX performance



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.


Find your next ETF

Reset All