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Remember that whole "Volatility as An Asset Class" wave? It's alive and well, but a tad different these days. There was a volatility "asset" that exploded in 2012, but with a slightly different twist. This, from ETF Trends:

A volatility-linked exchange traded product designed to move in the opposite direction of the VIX has more than tripled in price over the past year.

VelocityShares Daily Inverse VIX Short Term ETN (NYSEArca: XIV) has rocketed 221% for the 12 months ended Dec. 5, according to investment researcher Morningstar.

The incredible move shows how profitable betting against volatility has been in 2012.

XIV is an exchange traded note that provides the inverse, or opposite, of the daily performance of an index of futures contracts based on the CBOE Volatility Index, or VIX. The ETN charges a fee of 1.35% and has a market capitalization of about $355 million.

I did a double take when I saw those numbers, but he's right. The XIV traded in the 5s a year ago. It closed on Friday at $19.25.

Now, some of that is selective timing. The VIX closed at $30.59 on Dec. 8, 2011, so part of the monster impressive XIV lift has to do with VIX pretty much halving in a year. But part is just the fact that XIV doesn't inverse VIX; it inverses the iPath S&P 500 VIX Short-Term Futures ETN (VXX), otherwise know as The Worst ETN Ever.

Thanks to that, over time XIV will almost always rally in a VIX churn. For example, VIX is roughly unchanged since mid-March. XIV, however has almost doubled since then. This has worked over even shorter time frames. The VIX is also unchanged since Aug. 23, while the XIV has rallied 50% since then.

Sound too good to be true? Well, partly. 2012 was probably the worst of all worlds for VXX in terms of its relative performance to VIX. As every option writer around has noted, VXX gets clobbered when VIX futures trade in contango. And they've traded in contango all year, often of the steep-contango variety. On top of that, all the VIX has done this year is decline sharply early on, and then endlessly churn on a path to nowhere, That churn itself wears down VXX as well.

Since XIV captures the opposite of all that, its had a gale-force wind at its back all year. The one mild negative for any tracker is churn in the product that it tracks. But VXX hasn't churned -- it's pretty much just drifted -- hence, boom times for XIV.

I know not what 2013 brings. XIV also benefits from a bull market in general. Clearly a market decline and/or a spike in fear would hurt XIV. And don't forget, VIX itself sits at much lower levels now than it did at the end of 2011 and the beginning of 2012. In other words, don't look for another triple.

But do look for continued outperformance on a relative basis. I continue to believe we're about a year and a half into a "low" VIX regime, and they usually last 4-6 years. Of course, we'll see VIX spikes from time to time, but I expect them to generally fade, and ergo, the XIV to generally grind higher.

Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.


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