Checking in on XVIX
For the uninitiated, XVIX is designed to capture contango in near-term VIX futures while staying neutral to short-term changes in the VIX (read more from V&M and Only VIX). Specifically, the ETN maintains a 100% long position in VIX mid-term futures, plus a 50% short position in VIX short-term futures, rebalanced daily.
Using a mix of actual XVIX data since the ETN launched and the underlying S&P 500 VIX Futures Term-Structure Excess Return index before that, I’ve estimated XVIX results back to 2006. The dotted line denotes when XVIX launched (1).
[logarithmically-scaled, growth of $1]
For some context on just how well the ETN stays neutral to short-term changes in the VIX, the next graph shows XVIX (red) compared to the play du jour XIV (inverse short-term VIX, grey).
[logarithmically-scaled, growth of $1]
A significant increase in medium-term contango after the ETN launched effectively killed the goose that never got a chance to lay the golden egg (read more from Six Figure).
But I thought that XVIX deserved a mention because of the consistently negative results over the last 4 months. Zooming in on 10/2012 to date:
[logarithmically-scaled, growth of $1]
I haven’t crunched the nitty-gritty numbers yet, but I’m assuming that increasing contango in medium-term futures relative to short-term futures is responsible for taking XVIX negative.
It’s too early to get excited about, but if this trend continues, it might be useful play for VIX-neutral returns, and it’s something I’ll be keeping my eye on.
Happy Trading,
ms
(1) The best laid schemes of mice and men often go awry.
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Filed under: VIX & Volatility | 2 Comments
I am very (successfully) active in volatility etf’s and find your work to be one of the few reliable fact and quant based (versus opinion based) efforts out there. Thanks.
This post begs the question.. what is the driver behind the increased contango in the mid-term vix futures, and under what scenario could the curve flatten out and XVIX regain its backtested glory? Or is this a permanent regime shift?