Schaeffer's Trading Floor Blog

VIX ETFs: Only Time Will Tell

It's tough to evaluate new VIX ETFs as they work through the regulatory maze

by 7/2/2014 7:36 AM
Stocks quoted in this article:

Looks like the inventor of the CBOE Volatility Index (VIX) isn't the biggest fan of the iPath S&P 500 VIX Short-Term Futures ETN (VXX). This, from Brendan Conway in Barron's:

Robert E. Whaley, credited as the father of the "fear index," unloaded on exchange-traded funds and notes built around the index on Thursday, saying he was "shocked" and "appalled" at the makers of the products and at index maker S&P Dow Jones Indices.

"I was shocked," Whaley said on the sidelines of's Global Macro ETF Strategist Conference in New York. "I bought VXX as a play on volatility. But a week went by, two weeks, and the price went down," he said, even as the CBOE Volatility Index gained in price.

After some prospectus digging, Whaley says he discovered the features this blog has covered extensively which make the ETN unsuitable as a buy-and-hold investment: High carry costs cause the price to fall steadily in most market environments, such that it is down more than 99% since its 2009 inception. "Buying this is about the dumbest thing you could do," he said.

He should read! We've noted the VXX flaws about 7 bazillion times as well. Long story short: So long as the nearer-term VIX futures are in contango and/or at a premium to VIX itself, VXX will drift over the course of time. And VIX futures are almost always in contango and/or at a premium to VIX.

But alas, Mr. Whaley is not the ideal expert to dis Mr. VXX. He's now a partner in AccuShares Investment Management.

Who is that, you ask? Funny story:

The firm, AccuShares Investment Management, plans what it calls the AccuShares Spot CBOE VIX Up Shares and AccuShares Spot CBOE VIX Down Shares. The pair of ETFs, the news of which was broken on this blog in March, are envisioned as enabling investors to bet against one another using cash and cash equivalents in a fund whose price is intended to move in close approximation of the CBOE Volatility Index, not the futures indexes.

Look, his criticism of VXX and the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) and the like is spot-on. Five years and billions of lost value later, I'm pretty sure no one "invests" in one of these for too long without taking the time to learn why their "investment" has gone sour. But it was pretty irresponsible to have some of these products out there minus some more explicit warnings.

Clearly, though, lending his name and standing to benefit financially to a competitor product forces everyone to take Whaley's critiques with a grain of salt. Which is too bad -- because again, he's correct.

It's tough to evaluate these new VIX ETFs as they're still working their way through the regulatory maze. It sounds like a zero-sum combo. One side benefits for every move up in VIX itself, while the other benefits on every move down. It's great in theory, but will it actually work in practice? How does it handle quirks in VIX itself, such as the tendency for it to slide on Fridays or ahead of holidays or even in the latter part of regular trading sessions? Will they become the tail wagging the dog and impact VIX itself? We'll have to see the specifics, and really, we'll have to see them "live" before we can tell for sure if they're any good.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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