Should You Stuff Your Stockings With These Volatility ETFs?

If you give your kids these volatility ETFs for Christmas, make sure they don't hold them for long

by Adam Warner

Published on Dec 1, 2015 at 8:20 AM
Updated on Jun 24, 2020 at 10:16 AM

You've probably read/heard more than enough about Black Friday and Small Business Saturday and Cyber Monday. But let's say, hypothetically, you're still looking for some gift ideas.

May I suggest not using volatility exchange-traded funds (ETF) as a stocking stuffer this year? I mean, I know the kids love them, seeing as how they can scare their siblings and all with Mattel's new "Volatility Asset Super Hero" toys. But unless you want to only have them get gifts as a "trade," I'd stay away.

I did a little browsing in the derivative aisle and I don't like what I see. It's a relatively uninteresting year for the CBOE Volatility Index (VIX) so far, net-net. It had a rush near year's end in 2014, so comps always figured to be tough. It's down about 16% year-to-date, but with the S&P 500 Index (SPX) up 1% or so, it's not terribly out of line.

The iPath S&P 500 VIX Short-Term Futures ETN (VXX)​, however, not so much. See the chart below:

151201Warner1

Well, it hung pretty even with VIX through the end of April, but it's severely lagged since then. On a day-over-day basis, it typically moves about 40-45% of the VIX move. That's very variable, though. But, over the course of time, the contango effect hits and the lag gets worse.

There's no question a VIX churn hits VXX the hardest, but frankly, the real underperformance is thanks to the fact that VIX futures (and, ergo, VIX) never really caught up to the big VIX pop in August. Mean reversion assumptions are tough to shake. We did see the futures pretty much all north of 20 at the peak, but it was all relatively quick, and now we're basically back to where we almost always sit.

In the spirit of holiday sales, you do get VXX at a discount, right? Well, not really -- there's no value. It's a math calculation. If anyone ever tells you VXX is "cheap," run away, fast. At least there's one thing VIX owners can be thankful for. That is, they did better than double VXX!

151201Warner2

Only down 78.4% this year, wahoo! The VelocityShares Daily 2X VIX Short-Term ETN (TVIX), of course, combines the best of the contango weight of VXX with the compounding effect of a tracker and double leverage. Just hope your kids don't google this one!

If you want the anti-VXX, sort of the Darth Vader of volatility lovers, there's always the VelocityShares Daily Inverse VIX Short-Term ETN (XIV):

151201Warner3

That's actually the worst chart of all, and all it did was ultimately make the same net move as VIX. XIV is inverse VXX. It always underperforms simply shorting VXX, but usually not quite this badly. Compounding kills, and I guess the churn this year was net-net pretty awful.

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


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