Tag Archives: tvix

The Current VIX ETP Landscape

I have been writing about VIX ETPs since the launch of the initial duo of the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSEARCA: VXZ ) back in January 2009 and from 2010 onward I have been plotting all of them on a leverage/maturity grid like the one below. It is amazing how often various VIX ETP investors mentioned one of these charts when I talk to them. Even through the VIX ETP space has been relatively stable as of late, I have not updated this graphic since early 2014, so a refresh is long overdue. For those who have not been following along over the years, I have plotted every VIX-based ETP using leverage on the Y-axis and maturity on the X-axis. With the advent of what I am calling VIX strategy ETPs, I have isolated in their own box in the lower right hand corner a half dozen of these products whose characteristics do not necessarily imply a fixed point on Cartesian coordinate system. The key at the bottom highlights various salient features of each of these products. From previous incarnations, I have retained the presence of non-VIX legs (typically positions in SPX or the SPDR S&P 500 Trust ETF ( SPY)), the combination of both long and short legs, dynamic allocation of the legs and optionability. I have also shaded areas where there is high leverage/compounding risk as well as high roll yield risk. Not surprisingly, these risks converge at the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX ) and the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) , two of the more infamous VIX ETPs. Another carryover is font color, where black indicates ETFs and blue is for ETNs. This time around I have also added yellow stars for those ETPs with an average daily volume of 1,000,000 or higher and pink stars for ETPs with an average daily volume between 100,000 and 1,000,000. Note that while the C-Tracks ETN on CVOL (NYSEARCA: CVOL ) technically makes the cut, at today’s closing price of 0.40, any sort of meaningful reverse split to raise the price about 5 or 10 would highlight just how illiquid this issue is. In fact, only six VIX ETPs pass the one million share screen: TVIX, UVXY, the ProShares VIX Short-Term Futures ETF (NYSEARCA: VIXY ) , VXX, the ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY ) and the VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ: XIV ) . (click to enlarge) [source(s): VIX and More] There are three new additions to this graphic. The most notable of these are th e AccuShares Spot CBOE VIX Up Shares ETF (NASDAQ: VXUP ) and the AccuShares Spot CBOE VIX Down Class Shares ETF (NASDAQ: VXDN ), which were launched by AccuShares back in May. These products deserve a post (or series of posts) dedicated to some of the issues surrounding them, but the short version is that high complexity, frequent distributions and consistent tracking errors resulted in a product that investors decided was not worth their trouble. The other “new” products is, the UBS ETRACS S&P 500 VEQTOR Switch ETN (NYSEARCA: VQTS ) , the first ETP that tracks the SPX VEQTOR Switch Index , making it a relative of the Barclays ETN+ VEQTOR S&P 500 Linked ETN (NYSEARCA: VQT ) and the PowerShares S&P 500 Downside Hedged Portfolio ETF (NYSEARCA: PHDG ) , but one which uses a dynamic allocation to VIX futures to achieve a 10% target realized (historical) volatility. VQTS was launched in December 2014 and like most VIX ETPs, has struggled to reach critical mass. While the VIX ETP market is showing some signs of maturing, there are many new and exciting developments in terms of low volatility ETPs and more broadly in the ETP space in general. As I am currently at the IMN 20th Annual Global Indexing & ETF Conference – and scheduled to speak on a panel, “Trading the VIX: Riding Today’s Waves of Volatility” with Larry McDonald , Mark Shore and Matt Moran tomorrow – this seems like a good time to devote more time to writing and in particular to resurrecting the “and More” portion of this blog. Disclosure(s): net short VIX, VXX, UVXY and TVIX; net long SVXY, XIV and ZIV at time of writing

Sell UVXY: It’s Still A Busted ETF Heading Lower

UVXY is a widow-maker of an ETF, down more than 99.9% over the past five years. A recent trebling in its share price is irrelevant to longer-term investors. UVXY is still a terrible product, sell it or short it. It’s going to drop further. Volatility ETFs are one of the worst inventions to hit retail investors in the past decade. These products that are literally designed to go to zero if you read the fine print in the prospectus. And yet thousands of small-time investors and speculators get sucked into them, thinking this is a good way to bet on, or even prudently hedge against volatile markets. The iPath S&P 500 VIX Short-Term Futures ETF (NYSEARCA: VXX ) is still the gold standard for the space. And it’s a very lousy product. Short it or avoid it. However, with the dark magic that is a leveraged fund, you can take the inherent terribleness of VXX and cube it. Enter the ProShares Ultra Vix Short-Term Futures (NYSEARCA: UVXY ). The Velocity Shares Daily VIX 2x (NASDAQ: TVIX ) is basically the same functional product as UVXY in a slightly different wrapper and with less trading volume, but the same analysis applies. VXX, UVXY, TVIX and other such long volatility instruments are designed to benefit when the VIX rises. However, since VIX – somewhat inaccurately known as the “fear gauge” — is a mathematical construct rather than an actual investable instrument, no ETF tracks VIX properly. What you’re investing in when you buy VXX or UVXY isn’t the VIX you see scrolling across the CNBC ticker but rather a blended combination of futures contracts (derivatives) that aim to predict where VIX will be at a later date. There’s usually a large disconnect because VIX today and VIX in the future, leading to the returns on VXX and UVXY not coming close to what you’d expect just looking at spot VIX changes on the day. The general case against VXX and UVXY is rather simple. Volatility in the future is generally projected to be higher than volatility today. Since traders fear unknown future events more than the present knowable situation in most cases, traders will pay up more for protection farther into the future. Traders are usually more fearful of a crash farther along the horizon than in the short-term. Since VXX, UVXY and others own a mix of current month VIX futures and next month VIX futures, they tend to lose value when they have to rollover contracts. Say spot VIX as quoted on CNBC is 14, VIX futures for September are 16, and VIX for October is 18. Every day, VXX and UVXY have to sell some of their September contracts at 16 and buy Octobers at 18. They lose more than 10% of their net asset value (NAV) every month rolling over. Once October comes, October futures will be down to 16, Novembers at 18, and they’ll lose another 10% rolling again. VXX tends to lose about 70% of its value every year, and it’s largely driven by this effect. The long term impact of this effect, named contango, is most difficult. It’s why these funds always go down over the longer term, and why they make for poor investments. VXX is down from a peak of 7,000 (split-adjusted various times) in 2009 to 29 today. A drop of 99.6% since inception. UVXY’s done even worse, given the 2x leverage, falling from almost 500,000/share (yes, you read that right) to 64 just since 2011! (click to enlarge) Ouch! These are very-poor performing investments that most folks should steer clear of. However, now that the market is dropped and UVXY has tripled off the lows, everyone’s all excited about volatility products again. Now the talk of the town is that volatility is in “backwardation” meaning the usual value-destroying albatross that hits these investments is no longer in play. Backwardation, explained simply, is that now this month’s futures are worth more than next. If you can sell Septembers at 18 and buy Octobers at 16, your (NAV) rises 10% a month. If that state is maintained for awhile, particularly with UVXY’s leverage, you get some fat upside. And yes, that’s all true. But no, it doesn’t generally play out like that. Look at the long-term log chart of UVXY posted above. There were two periods of relatively long-lasting backwardation, during both the 2011 and 2012 market sell-offs. And UVXY and TVIX did indeed benefit from rising volatility and backwardation… however, the increases were very small compared to the larger downward trend. These instruments are so poorly constructed that brief periods of backwardation don’t move the needle. Backwardation almost never persists for a lengthy period of time because the market is almost always more fearful for the future than the present. Unless you’re actively seeing markets go through the floorboards right now, like during the recent Monday’s flash crash festivities, volatility expectations are almost always higher at a later date than what you see at present. While UVXY got to 90 during the current panic, it sold back off to 60 in just two days on a rather modest market recovery. And Tuesday, it dumped 19% again in a single day. Any instrument where you lose 33% of your money in two days or 19% overnight during a fairly routine market recovery is best avoided by most market participants. When you’re long UVXY, you are playing with fire. September VIX futures are currently at 26. Around 15 has been normal during this bull market. So just a reversion to normal wipes out more than a third of VXX’s value, and UVXY will suffer losses greater than that due to the leverage. The lottery ticket type upside in a crash scenario just isn’t worth the near certainty of an 50-75% loss in UVXY in coming weeks as the market and volatility stabilize. Even if you manage to time a sell-off correctly, you’re almost undoubtedly better off just buying puts on the market, through an ETF such as SPY. UVXY may go up 6x-8x if you hit a sell-off just right. Getting that, or a whole lot more, from SPY puts is no more difficult. In a perverse sort of way, it’s nice that these ETFs’ lives have dragged on as long as they have, as they are among the best short sales in the market. It will be a sad day when these sources of easy alpha are taken away from the short-selling arsenal. Disclosure: I am/we are short UVXY, VXX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Buying The Fear And Hedging With TVIX

Summary Is there reason to fear? Global markets are tumultuous with good reason. The best way to hedge and profit. Buy the fear; sell the greed. A common piece of advice, this is easier to accomplish in theory than practice. It has been a long bull market, one extended unnaturally in the zero interest rate policy environment since the housing crash. The result is elevated PE levels and absurd valuations for momentum-building story stocks. The rounds of quantitative easing under the Fed’s loose monetary policy have left the bond markets historically bloated, a fact substantiated by such notable personae as Bill Gross and Robert Shiller. In spite of these things and because of these things, historical hedges such as gold have been sold-off at an alarming rate. Pessimist blogger extraordinaire Zerohedge reported that as of July 24, 2015 hedge funds were net short gold futures for the first time ever. Hedge funds were selling short the classic hedge. The stock markets shrugged off the alarming fall of crude starting last fall. They shrugged off the 20% rise in the USD and the implications that had on corporate earnings. Earnings “adjusted for currency” became a nice comforting euphemism to bolster revenues hugely supplemented not by improvements in underlying businesses but in widespread financial manipulation via buybacks. Corporations have clearly lacked emphasis on organically growing revenues, opting to organically grow stock prices, touting it as “returning value to shareholders.” The vast majority of shareholders aren’t the ones getting paid in stock options… Russia fell on crude prices, their ruble falling almost 50% in the past year. Then the Chinese stock market started plunging. The Chinese government though, ever resourceful, opted to ban short selling as well as freeze trading on a good many companies in order to halt the precipitous decline ($2 trillion in value lost precipitous). Then in the past month China decided to let their currency, the renminbi decline in value. We’ll just do it once, they said. It will show that our market is becoming more free, they said. The slowdown in manufacturing growth has stymied the engine of global growth, impacting commodities and the countries that relied on their exports of those commodities disastrously. During this tumultuous time the American stock exchanges have remained remarkably consistent. I’ve been seeing a lot of days I thought would end in the red, but luckily for us all someone has been buying the dips and turning the indices green just enough. Today the buying finally lost its luster. The greed palpably began to turn to fear, sending the volatility index (VIX) shooting up over 25% on the day for August 20 . The Dow and S&P 500 both dropped over 2% for the day, and the assuredly-not-irrationally exuberant Nasdaq plummeted over 2.8%. Meanwhile the SPDR Gold Trust ETF (NYSEARCA: GLD ) spiked just shy of 1.75% for the day. Must be pretty worried about rate hikes, huh? That has been the primary focus of investors, as reported by mainstream journalists. How the Fed raising interest rates .25% from effectively zero will cause us all to lose our heads and immediately sell off everything. While markets have certainly responded to FOMC minutes and economic data, these reactions have been little more than knee-jerk ripples for quite some time. I think it is quite apparent that the powers-that-be in the investment world are much more worried about other things: like if our economy isn’t heading for another recession, when Greece will be allowed to default and focus on fixing their economy instead of haggling for more loans, how much China is slowing down, and the absurd amounts of sovereign debt in some pretty important developed countries. Remember when the U.S. sovereign credit rating wasn’t lower than Australia’s? Since S&P downgraded the U.S. in 2011 to AA+ we have added $4 trillion in debt. What’s a trillion a year anyway. What to do The first thing that I had to tell myself: Stop trying to predict the oil bottom. We are awash in an oil supply glut and Iran is gleefully coming to hawk their crude wares to the world. Demand hasn’t caught up to supply, and stock prices in oil companies haven’t caught up to their protracted loss of revenue. Slowdown of Chinese demand made that knife accelerate its fall, and I’m getting far away. it’s simple: when demand starts comfortably outpacing supply it would be wise to evaluate opportunities in the integrated oil market. So what can we do now? If you believe that volatile times are ahead, as I do, you can capitalize on that risk with a hedge that trades in it, the VIX. There are a few ETNs, or exchange-traded notes, whose values track the futures contracts of the volatility index. When the market goes down and the buyers’ market becomes the sellers’, the VIX spikes, and ETNs that track it spike with it. For those who are supremely confident that the economic situation is deteriorating, and fear is coming, there is a VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX ), up over 20.5% in market and after-market hours on August 20. If you do not want to expose yourself to leverage (I respect that), you can look into the iPath S&P 500 VIX Short-Term Futures ETN ( VXX), the unleveraged counterpart that tracks the VIX. This simple way to hedge against the market moving against you can be a powerful part of your portfolio. Rather than the small movements of a fund that sells short the Dow or the S&P, you have a hedge that encapsulates fully a diversified buy-the-fear strategy. (click to enlarge) TVIX wasn’t traded on exchanges during the Great Recession, as you can see it only tracks to 2011. That spike in 2011, when the U.S. was bumped down from the highest credit rating and given a negative outlook, could easily be replicated in October. National debt is already over the debt ceiling, as the U.S. treasury website attests, and it is projected to rise through at least 2025. Buckle, up, it’s going to be a volatile fall. If you are more traditional in your tastes, I would suggest the thousands-of-years old gold hedge. China has been buying it en masse, and they seem to be the only ones really controlling the markets, so a follow-the-leader doesn’t seem like too bad of an idea (I jest…sort of). In all seriousness, the rapid devaluation of gold has presented a fantastic buying opportunity. This is a commodity that has held value far beyond the lifespans of empires. For those of us that for some reason can’t have physical gold, a fund that holds gold bars is a suitable substitute, barring a complete shutdown of our financial system. Stan Drunkenmiller, of betting against the pound fame, recently bought $300 million worth of SPDR’s gold ETF that I mentioned earlier . Betting with a billionaire is a good strategy; betting with a billionaire hedging against oncoming catastrophe with an undervalued asset is a fantastic strategy. For long-term peace of mind, buy gold. For short-term profit, buy fear itself. Disclosure: I am/we are long TVIX, GLD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.