VXX 'Off the Lows': A Year of Living Competently

Defying its reputation, the iPath S&P 500 VIX Short-Term Futures ETN (VXX) is on a relative hot streak

Feb 12, 2015 at 8:53 AM
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We've spent a few days recently debating what goes into driving iPath S&P 500 VIX Short-Term Futures ETN (VXX) moves. But there's certainly something objective I neglected to mention: VXX has acted pretty well this year.

Our former punching bag closed 2014 at $31.51, so it's up modestly in 2015. That's pretty impressive, given that the S&P 500 Index (SPX) is now up modestly for the year. And CBOE Volatility Index (VIX) itself is down nearly 12%. Volatility as an asset class rules!

The laws of math still hold, so VXX will still ultimately drift lower so long as the near months remain in contango (albeit for different reasons than we assumed, as detailed on Monday). But the pace of hitting all-time lows has slowed to a crawl. We're now 45 trading days out from the last instance. It's just the latest in a year-long string of VXX competence. The following table shows the longest VXX runs (in trading days) between hitting new all-time intraday lows.

VXX streaks in between hitting all-time intraday lows

We're in the fourth streak of 40 or more days in the last year. Prior to January 2014, VXX only had five such streaks in five years. Further, from the debut of VXX on Jan. 30, 2009, through the end of 2013, VXX hit an all-time intraday low on 22.64% of all trading days. Since the start of 2014, that's down to 13.57% of days.

But before you jump on the VXX train, please remember that all this means is that VXX acted less poorly. It's partly because VIX itself has provided some wind at the back … or at least, no wind right in the face. VIX is up roughly 24% since the end of 2013. That doesn't actually cause VXX to lift -- in fact, VXX is down about 22% over that time frame. It does help keep VXX from imploding, though.

Most importantly, though, sentiment about future VIX remains bullish. Every pundit with a mouthpiece "knows" volatility will rise this year. VIX futures reflect that as they maintain their traditional premium to VIX.

I would agree that 2015 will prove better for volatility than 2014, at least in comparison to the median VIX of the two years. But realized volatility is starting to take a breather here, and it's very likely VIX will, too. And of course, that's going to ultimately drag VXX down.

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


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