Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Despite the extraordinary events of February 5 last year, resulting in no less than five VIX futures-linked exchange traded products (ETPs) being withdrawn, VIX ETPs are once again growing in popularity. The VelocityShares Daily 2x VIX Short Term ETN (Ticker: TVIX), for example, recently passed the $1 billion AUM mark, while competing products like UVXY and VXX continue to grow.
However, despite this resurgence in popularity, some advisors are reluctant to reenter an asset class that saw so much turmoil last February. This introductory article, together with several forthcoming and more detailed articles, will address some of those concerns, discuss the present VIX landscape, and help explain what really happened on February 5, 2018.
VIX ETPs are somewhat complex products that are designed to be actively traded rather than blindly bought and held. For example, in the TVIX prospectus, Credit Suisse states that the notes are, “…intended to be trading tools for sophisticated investors…” and that, ”the ETNs are only suitable for a very short investment horizon.” The reasons for this are varied and sometimes complex, but, put simply, positions in long-volatility products usually entail a slow but material decay, while positions in short volatility products can expose the trader to sudden losses. My colleague, Vance Harwood, and I have written extensively on how these products function, and if you have interest in knowing more I invite you to our research site or to contact us directly.
There are 11 VIX ETPs available to trade – seven long volatility, two short (or more correctly, daily inverse), and two strategy ETPs. While the long and inverse ETPs are somewhat simpler in that they offer almost consistent exposure to VIX futures though their defined link to the S&P 500 VIX Short-Term Futures Index (Ticker: SPVXSP) or its medium-term cousin SPVXMP, the strategy funds vary their exposure to the VIX futures according to a more complex methodology.
At the most turbo-charged end of the VIX market are the leveraged products – particularly the VelocityShares Daily 2x VIX Short Term ETN (Ticker: TVIX) and the slightly deleveraged (1.5x) ProShares Ultra VIX Short-Term Futures ETF (Ticker: UVXY). Both of these ETPs offer leveraged (either 2x or 1.5x) long exposure to SPVXSP VIX futures index. These two products together command almost $1.5bn of AUM – amounting through their leverage to almost $2.5bn of exposure the SPVXSP index. These products are liquid, performed well through February 5, and are best-suited to traders looking to benefit from spikes in equity volatility. That said, leveraged-long VIX ETPs like these suffer from the largest rate of decay, and traders need to time their entry and exit points carefully.
Leveraged-long volatility ETPs
|
Ticker
|
Name
|
AUM (m)
|
Vehicle Type
|
|
TVIX
|
VelocityShares Daily 2x VIX Short Term ETN
|
$912.22
|
Note
|
|
UVXY
|
ProShares Ultra VIX Short-Term Futures ETF
|
$548.69
|
'33 Act Partnership
|
On the unleveraged long side, the Barclays’ iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) continues to dominate the market with almost $900 million under management, as well as a liquid chain of available options. Its competition, the ProShares VIX Short-Term Futures ETF (Ticker: VIXY) is growing fast too, with almost $300 million under management. The ProShares product makes a useful fund or ETF based alternative to Barclays’ VXX note or ETN – funds don’t carry the same credit risk associated with notes.
Unleveraged long-volatility ETPs
|
Ticker
|
Name
|
AUM (m)
|
Vehicle Type
|
|
VXX
|
iPath S&P 500 VIX Short-Term Futures ETN
|
$861.73
|
Note
|
|
VIXY
|
ProShares VIX Short-Term Futures ETF
|
$286.84
|
'33 Act Partnership
|
|
VIXM
|
ProShares VIX Mid-Term Futures ETF
|
$42.54
|
'33 Act Partnership
|
|
VXZ
|
iPath S&P 500 VIX Mid-Term Futures ETN
|
$22.27
|
Note
|
|
VIIX
|
VelocityShares Daily Long VIX Short-Term ETN
|
$21.80
|
Note
|
Some of the AUM observed in the long and leveraged volatility products is no doubt due to short interests looking to express a short volatility view. While effective in expressing this view – shorting TVIX or VXX for example gives a trader a -2 or -1 exposure the underlying SPVXSP index – it also exposes the trader to undefined and unlimited loss if these products rapidly increase in value during a volatility spike. Inverse volatility products don’t suffer from this unlimited loss problem in the same way, and only expose the trader to the amount invested in the ETP.
Looking then at the short or inverse volatility products, investors are cautiously optimistic that the short volatility trade will return after the event last year. During periods of calm, short volatility ETPs can benefit from receiving the decay associated with long volatility ETPs, effectively receiving the premium the market is paying to insure themselves against equity market downturns. This trade grew increasingly popular – and profitable – in 2016 and 2017, before succumbing to a sudden and extreme drawdown in Feb. 2018.
Despite the correction, interest and AUM in the inverse products as begun to build again. The ProShares Short VIX Short-Term Futures ETF (Ticker: SVXY) for example, after peaking at almost $1.7 billion in AUM on Feb. 1st last year and falling to just $72m on February 5, has recovered to almost $350 million, despite having its leverage to the SPVXSP Index cut in half. Its medium-term cousin, the VelocityShares Daily Inverse VIX Medium Term ETN (Ticker: ZIV) has also recovered well, now commanding almost $100 million of AUM.
Inverse volatility ETPs
|
Ticker
|
Name
|
AUM (m)
|
Vehicle Type
|
|
SVXY
|
ProShares Short VIX Short-Term Futures ETF
|
$346.97
|
'33 Act Partnership
|
|
ZIV
|
VelocityShares Daily Inverse VIX Medium Term ETN
|
$77.66
|
Note
|
So if each of these products are designed to be traded rather than bought and held, what is available to the less active trader or investor? One option is a volatility strategy fund. The Barclays ETN + S&P VEQTOR (Ticker: VQT) dynamically allocates to a mixture of equity, volatility, and cash – specifically the S&P 500 Total Return Index and the S&P 500 VIX Short-Term Futures Index. On the face of it, the VQT is a good idea, dynamically allocating between equity and volatility to try and benefit from both, but with lackluster performance this year, just $15 million under management, and a lack of trading activity, investors may be put off by the relative complexity of dynamic volatility products.
Another is the iPath S&P 500 Dynamic VIX ETN (Ticker: XVZ). The XVZ divides its exposure between the short-term and medium-term VIX futures indexes using signals from implied forward volatility in the S&P 500. Despite a promising level of sophistication, the note has performed quite poorly since inception and amazingly has attracted less than $6 million in AUM. One if not both of these products may be retired soon.
Strategy volatility ETPs
|
Ticker
|
Name
|
AUM (m)
|
Vehicle Type
|
|
VQT
|
Barclays ETN + S&P VEQTOR ETN
|
$14.31
|
Note
|
|
XVZ
|
iPath S&P 500 Dynamic VIX ETN
|
$5.73
|
Note
|
So with strategy products becoming irrelevant, how should an advisor approach the VIX space? One way is as a short-term hedge. Products like TVIX and VXX offer clients exposure to spikes in volatility that could prove useful during market turmoil. Timing of these positions is of course paramount. A second way is to use the short volatility products like SVXY and ZIV to offer clients exposure to falling volatility that could be useful after market turmoil and during declining volatility. This approach could accelerate recovery after a decline, but also exposes the client to further losses if volatility is to rise further.
On the other hand, advisors might use the inverse products to collect the premium paid by those insured against market declines. Small holdings of SVXY and ZIV can offer an alternative exposure and return source to a client’s portfolio.
This article is highly introductory and covers only the very basics of the VIX ETP landscape. I plan to write further for Advisor Perspectives, introducing further concepts and ideas as a way to encourage understanding of the VIX products and their uses. I hope you’ll look out for more of my articles in the month ahead.
Stuart Barton is the designer of several volatility linked products and has made his career creating and managing volatility linked portfolios. He is also the founder of Invest In Vol, a volatility focused SEC Registered Investment Adviser headquartered in New York. Stuart holds a PhD from the University of Cambridge and is a CFA Charterholder.
All AUM data from ETF.com as of September 24, 2019.
More Active Management Topics >
