How to Ride 'The Next Great Volatility Pop'

Checking in on the new VXUP and VXDN

by Adam Warner

Published on Jun 9, 2015 at 9:06 AM
Updated on Jun 24, 2020 at 10:16 AM

We're getting closer to "distribution" time in AccuShares Spot CBOE VIX Fund Up Shares (VXUP) and AccuShares Spot CBOE VIX Fund Down Shares (VXDN), and that means we're getting closer to seeing how VXUP resembles the CBOE Volatility Index (VIX) itself (the hope), as opposed to the iPath S&P 500 VIX Short-Term Futures ETN (VXX) (the fear). 

The early cycle verdict was that VXUP should act just like VXX, thanks to the arb mechanism that keeps it in line with VIX futures. My thought (hope) was that as the distribution date neared, VXUP would move more in line with VIX itself, culminating on the actual day before the distribution. 

So far, my thought (hope) looks wrong. Here's how VXUP looked last week vs. VIX. 

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VIX had a bit of a range last week, relatively speaking, but you have to squint to even see VXUP on there. That's not a good sign. The idea behind VXUP and VXDN was to let investors better play tweaks in VIX itself. On the other hand, here's VXUP vs. VXX.  

150609Warner2

   

And so it remains. VXUP simply follows VXX around, albeit with more muted swings. It looks no different than it did "early" in the distribution cycle, strongly suggesting that the actual distribution will not have much (or any impact) on VXUP. 

I still expect VXUP to track VIX on Day Zero. A VIX future with one day left would pretty much track VIX, setting aside that VIX future and options settlement is different (modestly) from VIX itself. But that's utterly meaningless. 

And on top of, the markets are still wide, and the volumes are very light. That's all a real disappointment. 

There was absolutely no need for another VXX. It's well-known (I always hope) that it's a terrible long-term hold. But at least it's liquid and almost always active. It's a reasonable way to speculate on a short-term VIX move. It catches about half the VIX move in percentage terms on a day-over-day basis, so adjust your beta accordingly. And don't stick with it for too long. 

Unfortunately, VXUP and VXDN are going to go off the radar before they even get on anyone's radar. If you want to ride The Next Great Volatility Pop (already underway, perhaps), might as well just stick with VXX. 

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


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