Betting on VXX? Better Get Your Timing Right

More and more people are putting money into the iPath S&P 500 VIX Short-Term Futures ETN (VXX)

Mar 31, 2015 at 8:30 AM
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Don't look now, but our old friend the iPath S&P 500 VIX Short-Term Futures ETN (VXX) has gotten trendy again. This, via Callie Bost of Bloomberg:

"Speculators are again piling into an exchange-traded note that lets them bet on how long days of calm will last in the U.S. stock market.

"The trade, using a six-year-old security known as VXX that sees more average daily volume than shares of Microsoft Corp. and Facebook Inc., has usually backfired amid the biggest bull market since the 1990s. That hasn't curbed its popularity, with the iPath S&P 500 VIX Short-Term Futures ETN poised for an eighth straight week of inflows, a streak not seen in three years. Shares outstanding in the note are at an all-time high."

Just how big has VXX gotten? The story continues:

"VXX, one of the most popular ways to bet on bigger market swings, has absorbed $715 million in seven consecutive weeks of inflows, its longest streak of inflows since one ending in July 2012. The infusion of fresh cash has continued this week, swelling its market value to $1.5 billion, the highest since September 2013.

"At the same time, short-sellers in VXX -- people effectively betting the bull market will persist -- have dropped out. Short interest has slid 35 percent since October, falling to the lowest in more than seven months last week, data compiled by Markit Ltd. show."

On the one hand, it looks like they at least piled in at/near VXX lows. On the other hand ... that's not a concept that matters much. VXX has no tangible value; it's essentially a CBOE Volatility Index (VIX) path-driven mathematical concoction. It makes some modest sense to buy VXX when you expect VIX itself to lift on the presumption that the VIX lift will spill over into a VIX futures lift.

But, as we all hopefully know, timing well is beyond essential. VXX will almost surely drift over any time frame. So, even if you catch a VIX bottom, you may not profit from the VXX trade. The better question, though, is how well did rushes into VXX predict the future course of volatility? We only have two data points to work with here, but neither suggests we had "smart" money behind the VXX push.

In July 2012, VIX had an average close of 17.57. That dropped to 15.69 in August, and to 15.29 in September. Buying volatility worked modestly better in September 2013, the last time VXX had a market value this large. VIX averaged 14.69 in September 2013, and that measure popped all the way to ... 15.43 in October. Unfortunately, it then dropped to 12.97 in November. Results may vary, but that's mediocre at best.

All of this makes sense, of course. A move into volatility "assets" at a time when volatility is either "eh" or falling should classically turn into a contrary indicator. Throw in the fact that VXX shorts have backed away and we have more fuel to the contra fire. It's all stuff on the margins, of course, but it's always very unlikely that the masses will time their volatility purchases well.

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


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