VIX ETPs Flash Some Green in 2016

Last year I shocked quite a few investors and media outlets with the publication of Every Single VIX ETP (Long and Short) Lost Money in 2015.  My intent was not to tar and feather the VIX exchange-traded products landscape, but to highlight the fact that in an environment characterized by sharp VIX spikes and other volatility extremes, the power of volatility compounding price decay can overwhelm both long and inverse ETPs. 

In sharp contrast to across-the-board losses in 2015, the performance of VIX ETPs in 2016 was much more balanced and in line with historical norms.  While there were some sharp VIX spikes, the combination moderate volatility, above-average contango and persistent mean reversion translated into a sharp down year for the long VIX ETPs and a strong up year for the inverse VIX ETPs.  The more complex multi-leg, long-short and dynamic VIX strategy ETPs were closest to breaking even for the year, with half of these posting modest gains and half posting small losses.

In the graphic below, I have plotted the performance of all twenty VIX-based ETPs with respect to leverage and maturity, using leverage on the y-axis and maturity on the x-axis.  This group includes five VIX strategy ETPs that have no easily discernible point on the leverage-maturity grid.  Depending on how finely you wish to split hairs, these twenty ETPs account for anywhere from fourteen to eighteen unique ways to trade volatility long and short, across various maturities and according to a wide variety of strategic approaches. 

[source(s): VIX and More]

On the plus side, while both XIV and SVXY were up over 80% during calendar 2016, this performance falls short of the 2012 and 2013 numbers, where each ETP gained more than 100% in both years.  Similarly, while losses of over 93% for UVXY and TVIX must sound like a worst-case scenario for these two products, losses were over 97% in 2012 and just slightly better – at -92% – in 2013.  In terms of consistent winners, while their numbers have been more modest, the most consistent gainers in the VIX ETP space have been ZIV, TRSK and SPXH.

Two new VIX ETPs entered the fray in 2016:  VMIN and VMAX.  While these products have not yet attracted the interest of investors that I believe is warranted (VMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years), there is still time for investors to discover these products.  For the record, VMIN was launched on May 2, 2016 and outperformed both XIV and SVXY from the launch date until the end of the year, racking up an impressive 80.5% return in just eights months of trading.  Going forward, I would expect VMIN to regularly be the top performer in any period in which the inverse ETPs post positive returns.

For those who may be wondering, the VIX index was down 22.9% for the year, while the front month VIX futures product ended the year with a loss of 18.3%.

As is typically the case, contango was a significant performance driver during the course of the year.  Contango affecting the front month and second month VIX futures averaged a relatively robust 8.3% per month during the year (the highest since 2012), while contango between the fourth month and seventh month was slightly above average at 1.8% per month.

During the course of the year, five VIX ETPs were shuttered.  These include VXUP and VXDN, XVIX, CVOL and VQTS.  The biggest factors in the demise of these products was a lack of volume and assets.  In the case of VXUP and VXDN, the product complexity and cumbersome array of distributions also helped to quell investor enthusiasm.  Last but not least, I elected to drop XXV and IVOP from this list as these zombie ETPs both have less than 1% exposure to their underlying volatility index due to the lack of daily rebalancing.  As a result, these have become almost entirely all-cash vehicles, with a dash of volatility.  (For those who are curious about these instruments, follow the links above, click on the link to the prospectus and do a keyword search for “participation.”)

As an aside, for those who may be wondering, the flurry of recent posts is not an anomaly.  There is a lot to be said about the VIX, volatility, ETPs, market sentiment and many of my other areas of interest. With the the-year anniversary of the VIX and More blog just three days away, this seems like a good time to dive head first back into the fray.

Related posts:

• The Year in VIX and Volatility (2016)
• The 2016 VIX Futures Term Structure: Extraordinarily Average
• My Low Volatility Prediction for 2016: Both Idiocy and Genius
• Every Single VIX ETP (Long and Short) Lost Money in 2015
• Performance of VIX ETPs in 2013
• Performance of VIX ETPs During the Recent Debt Ceiling Crisis
• VIX ETP Performance in 2012
• Expanded Performance of Volatility-Hedged and Related ETPs
• Performance of Volatility-Hedged ETPs
• Performance of VIX ETP Hedges in Current Selloff
• Comparing SPLV and VQT
• ZIV Undeservedly Neglected
• Will TVIX Go To Zero?
• Four Key Drivers of the Price of TVIX
• Credit Suisse Suspends Creation Units in TVIX: What It Means
• TVIX Creation Units Return: What It Means for Investors
• All About UVXY
• The Case for VQT
• Slicing and Dicing all 31 Flavors of the VIX ETPs
• Charting the Assets of the Volatility-Based ETPs
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• First Day of Trading in VXX and VXZ a Success

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): net short VXX, VMAX, UVXY and TVIX; net long XIV, SVXY and ZIV at time of writing

The Current VIX ETP Landscape

I have been writing about VIX ETPs since the launch of the initial duo of VXX and 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/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 TVIX and 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 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, VIXY, VXX, SVXY and XIV.

[source(s): VIX and More]

There are three new additions to this graphic. The most notable of these are VXUP and 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, VQTS, the first ETP that tracks the SPX VEQTOR Switch Index, making it a relative of VQT and 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.

Related posts (a selection from literally hundreds of posts on VIX ETPs):

• Performance of VIX ETPs in 2013
• Performance of VIX ETPs During the Recent Debt Ceiling Crisis
• VIX ETP Performance in 2012
• Expanded Performance of Volatility-Hedged and Related ETPs
• Performance of Volatility-Hedged ETPs
• Performance of VIX ETP Hedges in Current Selloff
• Comparing SPLV and VQT
• ZIV Undeservedly Neglected
• Will TVIX Go To Zero?
• Four Key Drivers of the Price of TVIX
• Credit Suisse Suspends Creation Units in TVIX: What It Means
• TVIX Creation Units Return: What It Means for Investors
• All About UVXY
• The Case for VQT
• Slicing and Dicing all 31 Flavors of the VIX ETPs
• Charting the Assets of the Volatility-Based ETPs
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• First Day of Trading in VXX and VXZ a Success

Disclosure(s): net short VIX, VXX, UVXY and TVIX; net long SVXY, XIV and ZIV at time of writing

An Updated Field Guide to VIX ETPs

With the sudden success of TVIX, it seems as if the entire VIX exchange-traded product (ETP) space has a large number of new converts. Growing from just two products at the end of 2009 (VXX and VXZ) to 12 by the end of 2010 and 31 by the end of 2011, VIX ETPs are a growth industry.

For those who trade or invest in the VIX ETP space, I thought the graphic below – a field guide of sorts – might be of assistance. The intent of the graphic is to differentiate between the various VIX and volatility-based ETPs primarily by mapping them according to target duration and leverage. The key at the bottom of the graphic highlights some additional distinctions, such as:

• ETPs that hold some non-VIX securities in their portfolio are marked by a black triangle. These include VQT and CVOL, which hold long or short positions in SPX/SPY
• ETPs that include both long and short VIX positions in their portfolio (VQT, XVZ and XVIX) are flagged with a red/green rectangle
• ETPs with a dotted outline (VQT and XVZ) have a rule-based dynamic allocation of volatility components
• the red ovals highlight those five VIX ETPs that are currently optionable
• the large light red shaded area incorporates all the ETPs that use 2x leverage (there are no 3x VIX ETPs)
• the large orange shaded area incorporates all the ETPs which have a target average weighted one month duration and thus are particularly susceptible to the influence of contango and negative roll yield in the VIX futures portion of their holdings

There are some other important distinctions that are difficult to work into the chart, but one I did incorporate was to flag VIX ETFs (from ProShares) in a black font, while all the ETNs are in a blue font.

For the sake of completeness, I also included a necrology of the two VIX ETPs that were closed last year. Interestingly, both were immediately succeeded with virtually identical products that trade under a similar ticker.

Going forward I fear that the next round of VIX ETPs may make it impossible to capture the same level of detail as I have done in this single page, but for now at least, this is my reference of choice for VIX ETPs.

Related posts:

• VIX Exchange-Traded Products: The Year in Review, 2011
• Four Key Drivers of the Price of TVIX
• Slicing and Dicing All 31 Flavors of the VIX ETPs
• Now Sixteen Volatility ETPs, Four of Which Are Optionable
• Two More VIX ETNs Make it a Baker’s Dozen
• Impressive Launch for Sextet of New Volatility ETNs from VelocityShares
• VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products
• The Evolving VIX ETN Landscape
• Interesting New Leveraged Volatility ETN Coming from Citi
• Shorting VXX and Long XXV or XIV
• Charting the Assets of Volatility-Based ETPs

Disclosure(s): long XVZ, short VXX and short TVIX at time of writing

CVOL Steps It Up

In Citigroup Belly-Flops into the ETP Sponsor Pool, Ron Rowland had some harsh criticism for Citigroup seemingly stealth launch of the C-Tracks ETN on CVOL (CVOL) earlier this month.

I am glad to report that Citigroup now has a nifty new web site devoted to CVOL (see graphic below) that includes the prospectus, historical closing prices, a list of the factors and values that are inputs into the CVOL daily calculation (nice!) as well as a description of key risks and key terms and an attractive little charting module. In other words, Citigroup has stepped up to the plate in a big way here.

…and I’m excited that they have done so because I think CVOL has a great deal of potential. I will get into this in more detail in future posts, but essentially this ETN has chosen a much flatter part of the VIX futures term structure than VXX and is using 2x leverage to account for the fact that in the 3-4 month VIX futures maturities, volatility tends to move more gradually on a day to day basis than it does in the cash/spot VIX or in the front month VIX futures. Eventually, I think investors will warm up to this tradeoff, but until CVOL has a sufficient track record to convince some investors that in some respects CVOL has some advantages to VXX, I would expect adoption to be gradual.

So far the volume in CVOL has been low and the spreads have been very wide (often as high as 1%), but as soon as these spreads start to narrow and volume picks up, I expect to be an active trader in CVOL.

Related posts:

• Interesting New Leveraged Volatility ETN Coming from Citi
• The Evolving VIX ETN Landscape
• VelocityShares Jumping in to the VIX ETP Space with Leveraged and Inverse Products
  
  

[graphic: Citigroup]

Disclosure(s): short VXX at time of writing

VelocityShares Jumping in to VIX ETP Space with Leveraged and Inverse Products

Less than two weeks after I mapped out the various VIX exchange-traded products (ETNs + ETFs) in The Evolving VIX ETN Landscape, that landscape has has already changed dramatically. The first surprise was the launch of the C-Tracks ETN on CVOL (CVOL), a direct competitor to VXX, one week ago today.

The bigger change, however, is a suite of six new VIX-based ETNs on the way from VelocityShares (see filing) to be issued by Credit Suisse (hat tip to Adam Warner, who may be de-blogging for awhile, but is still tweeting his thoughts.) In the updated VIX ETP graphic below, I have coded the new VelocityShares products with a (V) suffix. In terms of covering the existing waterfront, the new VelocityShares products include VIIX and VIIZ to compete directly with VXX and VXZ, with the inverse XIV to compete against XXV.

The innovations come in the form of new leveraged ETNs as well as a new inverse ETN which targets VIX futures with a five month maturity. In the +2x space, these are TVIX (one month target maturity) and TVIZ (five month target maturity). In the inverse space, the new entry is ZIV, which has a five month target maturity.

For volatility traders, these are exciting developments. While I have no idea what the timeframe is for the launch of the new VelocityShares products, I can already envision dozens of exciting trades...which has me wondering why I am blogging about this instead of opening up a hedge fund...

Related posts:

• Interesting New Leveraged Volatility ETN Coming from Citi
• The Evolving VIX ETN Landscape
  

Disclosure(s): short VXX at time of writing

CVOL Begins Trading Today

Today the first non-Barclays volatility ETN began trading (CVOL), whose formal name is (and I am not making this up) “C-Tracks Exchange Traded Notes Based on the Performance of the Citi Volatility Index Total Return.” Fortunately, what I will be affectionately calling CVOL also has a formal short name of “C-Tracks ETN on CVOL” so that if anyone happens to ask you what CVOL stands for at a cocktail party, at least you can blurt out the answer in one breath.

Going forward, the big question is how CVOL and its 3-4 month VIX futures target maturity and 2x leverage component will perform relative to the Barclays competition: VXX and VXZ.

CVOL will need some more volume and liquidity before we can make some meaningful comparisons, but with 3900 shares traded today, at least some investors are already stepping up to the plate.

The links below provide some additional information about CVOL and attempt to locate it in the VIX ETN universe.

Related posts:

• Interesting New Leveraged Volatility ETN Coming from Citi
• The Evolving VIX ETN Landscape

Disclosure(s): short VXX at time of writing

The Evolving VIX ETN Landscape

As of today, only four VIX exchange-traded products (ETNs and ETFs) are available for trading. All of these have been Barclays products and three of the four carry the iPath brand name. In descending order of volume, the VIX-based ETNs currently being traded are:

• iPath S&P 500 VIX Short-Term Futures ETN (VXX)
• iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)
• iPath Inverse S&P 500 VIX Short-Term Futures ETN (XXV)
• Barclays ETN+ S&P VEQTOR ETN (VQT)

Five other companies (ProShares, Direxion, Citigroup, Jefferies and Bank of America) have VIX-based ETNs and ETFs (in the case of ProShares) in registration or have made announcements about forthcoming products, but I am unaware of any target launch dates.  In order to simplify matters a little, henceforth I will start to refer to these products as exchange-traded products or ETPs.

In order to attempt to simplify and catalog the growing universe of available and announced VIX-based ETPs, I have assembled the chart below. The chart uses the y-axis to plot the leverage used (all are standard +1x ETPs, with the exception of the +2x CVOL and the sole inverse product, the -1x XXV) and the x-axis to plot the target maturity. VX 1 mo. is short for VIX futures with a constant maturity of one month, etc.

I have identified each ETP by its ticker (I do not yet have tickers for the Direxion or Bank of America products) and have coded these with a one or two letter suffix to identify the issuer (P for ProShares, D for Direxion, C for Citigroup, J for Jefferies and BA for Bank of America.) ETPs that are currently traded are in bold blue; ETPs that have not yet been launched are in red font.

The final piece of information involves grouping the ETPs into five clusters which represent the five approaches currently being used for VIX-based ETPs. For all intents and purposes, the ETPs in each cluster are (or appear to be, at this juncture) equivalent in construction and should behave in a similar manner. Group #1 for instance, has been the dominant theme in the volatility ETP space to date. The focus here is on VIX futures with a constant maturity of 30 days. VXX was the first to market, but competitive offerings from Jefferies and ProShares are on the way. Group #2 uses a similar approach, but with a 5-month target maturity. Group #3 is the inverse of Group #1.

Group #4 represents what I consider to be a second generation of products, with a dynamic allocation of 2.5% to 40% (see Barclays VEQTOR ETN Begins Trading for details), which is why the group is shown here as having less than +1x leverage.

The newest VIX ETP approach comes from Citigroup, where their CVOL product not only targets a new portion of the VIX futures term structure (3-4 months), but adds a +2x leverage component and also includes a “variable weighted short position in the S&P 500 Total Return Index” as well.

Things continue to get more and more interesting in the VIX ETP space. I look forward to the launch of some of these newer products and to seeing how they perform.

It should go without saying that as the VIX ETP landscape continues to evolve, I will do my best to attempt to map it in a meaningful manner.

Related posts:

• XXV and the New VIX ETN Landscape
• Interesting New Volatility ETN Coming from Citi
• Barclays VEQTOR ETN Begins Trading
• Overview of the U.S. Volatility Indices
• Ten Things Everyone Should Know About the VIX
  

 

Disclosure(s): none

Interesting New Leveraged Volatility ETN Coming from Citi

Yesterday in Citi Files to Offer Long/Short Alternative to VIX ETFs, Murray Coleman of Barron’s tipped me off to a new ETN filing from Citigroup for the C-Tracks Citi Volatility Index ETN, which has been assigned the ticker CVOL.

I’d like to highlight two nuggets from the preliminary pricing supplement.

First, an overview:

“The Index is a new index established by Citigroup Global Markets Inc., as index sponsor. The Index is published by the Chicago Board Options Exchange (the “CBOE”) and is a measure of directional exposure to the implied volatility of large-cap U.S. stocks. As a total return index, the value of the Index on any day also includes daily accrued interest on the hypothetical notional value of the Index based on the 3-month U.S Treasury rate and reinvestment into the Index. The methodology of the Index is designed to produce daily returns that are correlated to the CBOE Volatility Index (the “VIX Index”), which is another measure of implied volatility of large-cap U.S. stocks. However, the Index is not the VIX Index, and returns on each of these indices may differ substantially.”

Second, some of the details of how this ETN works:

“The Index methodology uses a combination of returns on (a) a long exposure to third- and fourth-month futures contracts on the CBOE Volatility Index (the “VIX Index”) published by the Chicago Board Options Exchange, Incorporated (the “CBOE”) (the “VIX futures contracts”), multiplied by a factor of two, (b) a weighted short position in the S&P 500^® Total Return Index (Bloomberg L.P. ticker symbol “SPXT:IND”) (the “S&P 500^® Total Return Index”), as reduced by the Treasury Return determined by the formula described below under “—Composition of the Index—Treasury-Based Interest Accrual Component; Calculation of the Index Level” (the “Treasury Return”) and (c) an interest accrual on the notional value of the Index based on the 3-month U.S Treasury rate and reinvestment into the Index, all as described below.

The weighting of the S&P 500^® Total Return Index short position is determined monthly by a regression over a 6-month backward-looking window of (a) the difference between the VIX Index daily returns and twice the daily returns of the relevant VIX futures contracts versus (b) the S&P 500^® Total Return Index as reduced by the Treasury Return. See “Risk Factors Relating to the C-Tracks—The Index May Underestimate the Volatility Levels” in this pricing supplement.”

In a nutshell, the forthcoming Citi product tries to find a balance between the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) by using an intermediate point in the VIX term structure and adding leverage. The biggest problem with VXX has been the negative roll yield associated with the persistent contango in the VIX futures. At the other end of the spectrum, the problem with VXZ is that it moves like molasses and typically captures only a small fraction of any move in the VIX and VXX. See Lost in Translation: VXX and VXZ for an overview.

What the Citi product apparently hopes to do is to move down the VIX futures term structure to minimize roll yield and use leverage to amplify the changes in volatility in that portion of the term structure.

While there is no date set for the launch of the new Citi 3-4 month 2x volatility ETN, I am very much looking forward to its launch and firmly believe that it will provide the basis for some very interesting volatility trading opportunities, both on its own or in combination with VXX and VXZ.

Related posts:

• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• VXX Monthly Performance
• Chart of the Week: VXX Celebrates One Year of Futility
• Chart of the Week: VXX vs. VIX
• Lost in Translation: VXX and VXZ

Disclosure(s): short VXX at time of writing