Proprietary Data Insights Retail’s Top Volatility ETF Searches in the Last Month
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Why Volatility ETFs are a Death Sentence |
Volatility may not be a tangible object. But that doesn’t mean you can’t own exposure to it. Since its launch in 1993, the CBOE’s S&P 500 Volatility Index (VIX) has been the gold standard for measuring market volatility as implied by options. Today, you can trade everything from volatility options to futures and even ETFs. iPath’s Short-Term VIX Futures VXX ETN is one of the most popular instruments in this category. When volatility jumps, the VXX can soar by dozens of percentage points. However, holding on to it long-term is a losing proposition. If you want to play with this ETF or others in the category, here’s what you need to know. Key Facts About VXX
Let’s start by stating something obvious. The VXX and all the others we’ll talk about today aren’t ETFs. They’re ETNs (exchange-traded notes). Essentially, these are debt instruments issued by the bank that say they’re worth something. In this case, their worth is tied to the performance of VIX short-term futures. This adds an extra layer of risk since you can have the issuing institution go belly up or collapse the instrument, which has happened before. Fun fact: This actually happened to an ETN in February 2018 that had 2x inverse exposure to the VIX. The VXX isn’t likely to have that problem. It tracks the daily performance of short-term VIX futures. However, this naturally creates a loss in value over time. You see, volatility is mean-reverting, meaning it goes back to its historical average and has a greater tendency to do so the farther away it gets. Thus, gains in volatility are temporary and limited. On top of this, volatility futures normally sit in contango, a condition where futures that settle further into the future cost more than near-term settlement. So, when the near-term contract’s due date comes, you sell those and buy the next one down the line. Because that next one is almost always more expensive, you lose money. That’s why the VXX, and nearly every other volatility futures-based ETN, loses value over time. Performance To show you the proof, this is the performance chart of the VXX over the past several years.
Source: iPath Outside of super spikes, which can make you a lot of money in a short amount of time, the ETN naturally loses value. Competition To further illustrate this point, we’re going to compare the top volatility ETN searches from our TrackStar database.
There are a few points we want to make here. First, all the fees are roughly the same because they all have similar strategies. Second, the long-term performance of the short-term future exposure is devastating. Yet, medium-term exposure is still a loser. Lastly, there aren’t a lot of assets under management in any of these ETNs precisely because they aren’t worth owning over the long run. Our Opinion 0/10 If you want to trade these instruments, use options. Otherwise, these are not appropriate for any investor. Not only are there better ways to hedge, but issuers can and do change the rules of the road at any time. A great example is that in 2022, Barclays, the issuer behind the VXX, suspended share issuance in March of that year, causing the VXX to trade at a significant premium over its indicative value. The ETF fell when they resumed issuing shares in September of that year. Oh, did we mention that the VXX was replaced by itself in 2018 because the original one (which started in 2009) hit maturity? If this sounds complicated, it’s because it is. Do yourself a favor. Stay away from the VXX. |
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