You know exchange-traded funds have arrived when USA Today starts covering leveraged VIX ETPs.
With the recent wild market swings, it is not surprising people are talking about VIX exchange-traded products, which track derivatives on an index that goes up when there is fear in the market.
Now anyone who understands these exotic products would most likely advise investors to approach with extreme caution, or even stay away completely. But for those who are absolutely set on getting exposure to the VIX index, there is a legitimate case for using the two-times leveraged ones that the article covers – namely the VelocityShares Daily 2x VIX Short Term ETN (TVIX) and the ProShares Ultra VIX Short-Term Futures (UVXY). The recent market turmoil has proved this yet again.
VXX and others like it don’t actually track the VIX index at all and thus they fall short when it spikes.
You can’t make an ETF that holds actual VIX, which is a calculation based on implied volatility on options of the S&P 500 index. This is impossible. However, VIX ETFs do the next best thing — they track front and second month futures on the VIX index. This is something they do exceptionally well and are rarely given credit for. The problem is VIX futures don’t do a good job of tracking pure VIX. Well, unless you leverage up.
VIX VXX TVIX UVXY
8/20/2015 25% 8% 17% 17%
8/21/2015 46% 18% 34% 35%
8/24/2015 45% 18% 37% 36%
9/1/2015* 10% 14% 31% 30%
Table: VIX ETFs’ daily performance on recent spikes in volatility
It is easy to see from the table above just how little of the move in the VIX is actually captured by VXX. Typically, investors get less than half – sometimes a third – of a big move in VIX. While that is still typically more than what double inverse S&P 500 ETFs return on bad days, TVIX and UVXY get much closer to those jaw-dropping spikes in VIX.