Spot VIX and the Batch of ETFs in the Pipeline

What the next round of ETFs could mean for spot VIX trading

Mar 6, 2015 at 8:22 AM
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    We all (hopefully) know the myriad problems associated with buying and holding volatility exchange-traded funds (ETFs). But perhaps that's about to change. What if I told you there was a way to buy spot CBOE Volatility Index (VIX)?

    You would probably say "that's ridiculous." Just go long Friday's close and close out every Monday. VIX averages about a 2% lift on Mondays, and you'll double your money in under one-and-a-half years.

    I doubt we'll have that opportunity available. But it's not stopping some interesting new listings in the pipeline via AccuShares. This, from Tom Lydon at ETF Trends:

    "AccuShares Investment Management is entering the exchange traded fund arena with a suite of alternative strategies that could help investor track the spot price movements of a group of commodities and the CBOE Volatility Index, or VIX.

    According to a Securities and Exchange Commission exemptive relief filing, AccuShares is working seven paired-class share ETFs that move in opposite directions, or so-called Up Shares and Down Shares.

    ...Each ETF is designed for investors seeking cost-effective, targeted and transparent exposure to various spot and spot proxy prices represented by the ETF's Underlying Index. AccuShares intends to offer two class shares in each ETF, one designed for investors with a positive view of future index performance and one designed for investors with a negative view of future index performance.

    …The ETF provider is expected to come out with the CBOE VIX options first sometime in the second quarter. AccuShares has also partnered with Robert Whaley, who developed the CBOE Market Volatility Index "VIX" for the Chicago Board Options Exchange, to launch the new volatility ETFs as an more efficient alternative to other VIX futures-based options on the market."

    According to the piece, AccuShares has some sort of patented design that lets them track futures without the pesky math of contango. Or something like that.

    It's tough to assess whether these will actually work as designed without knowing exactly what they do. It's also confusing. They claim this ability to track futures above, but the idea is to track spot?

    In a basic commodity, there may or may not be a huge distinction in that they move in high correlation. In VIX, though, not so much -- they're two separate animals. Yes, it would be nice to have an ETF that didn't lose money every day in contango. But it's still not tracking VIX.

    Does the Up Shares/Down Shares structure make Spot VIX tracking possible? I suppose. It's a zero-sum game. As per the post, the fund itself doesn't actually hold any futures or swaps. It sounds like it's simply taking cash from "Peter" (say, the "VIX Up" crowd) to pay "Paul" (the VIX Downers). Or vice versa.

    But again, is someone selling me VIX Ups on the close just ahead of weekends and holidays? Is there some sort of parity, and can I buy it there? Can I buy VIX Downs ahead of pre-holiday weeks? These are all positive-expectancy trades that you can't actually do now, and I strongly doubt we can do after the listing either. We'll know more, though, when we see the actual structure.

    Hey, it's interesting if nothing else. I doubt anyone's giving free money out, so kudos if they've actually figured out an easily accessible way to "trade" spot.

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

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