Barclays’ XXV —the first ETN with nowhere to go?


Tuesday, September 25th, 2012 | Vance Harwood

Update.  Barclays’ has responded to the problems noted below with their IVOP ETN.    See this post for more information.

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Originally Posted December 11, 2011

Question: What would the value of Barclays’ inverse volatility XXV ETN be if Barclays’ volatility VXX ETN goes to zero?

Answer $40 / share

As this Volatility Futures and Options post makes clear, Barclay’s XXV doesn’t have much of a future.  Currently at $33,  it can’t go higher than $40,  a 21% increase from where it is now—regardless of how low VXX goes.   After a 50% rise in its first 3 months of existence, this little nova of a fund is doomed to spending the rest of its life in lethargy.

To me XIV, VelocityShares Daily Inverse VIX Short-Term ETN, which tracks the inverse daily returns of VXX, looks like a much better solution if you want to profit from VXX’s contango driven path towards zero.

The graph below shows how XXV has run its course, and how XIV is giving superior performance.

XXV vs XIV, click to enlarge

 

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Tuesday, September 25th, 2012 | Vance Harwood
  • J Douglas Wood

    question: if one was to short svxy or xiv as a hedge on if the market crumbles, does con tango/ backwardation / decay help as a tailwind? I’m researching this topic of whether inverse etn/etf’s have this advantage and I’m getting different directions from multiple websites. I would think there is some sort of decay. Case in point: chart 1year vxx vs xiv.

  • vance3h

    Hi J., In a strong market correction the VIX futures tend to go into backwardation, which would indeed provide a tail wind for a short svxy or xiv position. The path sensitivities that these daily percentage funds also would tend to help a short position. Since volatility tends to drop back to average quickly once the panic subsides I don’t think holding a short position on these inverse funds for a long period of time is a good idea. They can recover in a hurry. Unless you want to monitor your position constantly I recommend you look at something like XVZ which has a much kinder long term behavior but still benefits from volatility jumps.

    – Vance