XIV looks like a winner—if you have the stomach for it…


Updated: Jul 22nd, 2011 | Vance Harwood | @6_Figure_Invest

VelocityShares’ daily inverse volatility fund XIV has only been around since November 30th, 2010, but it has already delivered in a head turning 44% gain. This performance is not totally surprising given the collapse of VXX in the last two months, but how would it have behaved in less favorable times—let’s say the Flash Crash?

I did a back synthesis of XIV starting January 4th, 2010 to get a feel for its longer term performance. Since its goal is to match the inverse daily performance of VXX this is a relatively straightforward task (at least compared to mind twisters like CVOL or XVIX). It’s not as easy to get your head around as making investments at sites like BullionVault.com, but a backtest like this can give you a good feel for how an investment will behave. I did not factor in the 1.35% annual fee or treasury bill interest in my calculations. My results are shown below:

XIV v.s. VIX and XXV, click to enlarge

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Some observations:

  • The XIV actuals (blue in upper right) and XXV actuals (orange data points), are landing right on top of my synthesized values.  This gives me some confidence in my models
  • If you could have invested in XIV at the beginning of 2010, you would have only been down 20% at the worst of the Flash Crash. This is pretty impressive given the dynamics of that correction. VXX jumped 80% during the Flash Crash, from 20 to 36.
  • XIV would have climbed from 50 to 138, starting January 4th, 2010 and ending last Friday—a 175% increase in less than 13 months. Wow!

The fuel for this rocket is the fierce contango that VXX must deal with in rolling its volatility futures to provide a constant weighted average volatility maturity of one month. It’s not set in stone that volatility futures will continue to have a steep increase in price with longer dated contracts, but it does seem to be a stable situation. If VXX and VXZ stop being the dominate ETNs in the volatility space this might change, but I don’t expect that to happen in 2011.

For a link to XIV’s prospectus see this page, which lists all active volatility ETNs/ETF along with links to their prospectuses.



Friday, July 22nd, 2011 | Vance Harwood
  • VIX enthusiast

    Excellent. Is there any way to backtest this to pre-2008?

  • Vance3h

    My methodology will only work back two years, because that is how long VXX and VXZ have been trading. Earlier than that you need access to volatility futures historical data. See here for a 5 year backtrack http://onlyvix.blogspot.com/2011/01/de-constructing-xvix.html

    – Vance

  • Nate

    I have watched this as the volatility has come back out of the market over the past couple days and the correlation doesn’t seem to be holding up on the way down. Today for instance, the VIX is down over 14%, but the XIV only 4%? one case last week, the VIX and XIV were both down on the day? Any ideas?

  • Hi Nate,
    Welcome to the mind-bending fun of volatility. Everyone talks about / follows the VIX index, but no one has figured out how to create an investment that tracks it, or its inverse. As investors we have to make do with proxies like VXX and XIV that are based on volatility futures, not the VIX itself. The rule of thumb I use is that VXX usually has 50% of the percentage move that VIX has–in either direction. Even this doesn’t always hold true–like your example when both VIX and XIV dropped on the day. XIV matches the negative daily percentage moves of VXX, so on that day VXX probably went up even though VIX dropped.

    — Vance

  • dph

    This is a great post since right after you wrote about XIV it went on a near 70% drawdown but is still up over 200% even from the time of the post. Quite the roller coaster. Might be a lesson too that people can buy the dips if they can stay the course. Looks like another dip might be coming this Summer.