Volatility ETFs: Both Lousy Hedge & No-Win Bet

September 10, 2015

The VIX is back on the downswing. After peaking for a brief moment above 53 on Aug. 24, the CBOE Volatility Index has halved to about 25, as of this writing.

That's not unusual. The VIX, which measures the implied volatility of near-month S&P 500 options, tends to spike most dramatically when market fears are the highest.

Spot VIX & Front-Month VIX Futures

On Aug. 24, when the S&P 500 plunged as much as 5.3 percent (and the SPDR S&P 500 ETF (SPY | A-99) fell as much as 7.8 percent), that fear reached its maximum point.

Since then, concerns have abated, though they still remain somewhat elevated. Any VIX reading above 20 is seen by many investors as a sign of trepidation.


But if stocks stabilize and ultimately resume their climb, the path of least resistance is down for the VIX. That bodes ill for ETFs like the iPath S&P 500 VIX Short-Term Futures ETN (VXX | B-62), which tracks near-month VIX futures contracts.


Bad Hedge

A perennially poor performer, VXX and similar products such as the ProShares VIX Short-Term ETF (VIXY | B-61) and the VelocityShares VIX Short-Term ETN (VIIX | B-62) have lost tremendous value over virtually every time period.

Since its inception in January 2009, VXX is down 99.6 percent; from a year ago, it’s down 2.8 percent; and year-to-date it's down 15.1 percent.

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