Backtesting VelocityShares’ ZIV inverse volatility ETN to 2005

Friday, January 11th, 2013 | Vance Harwood

All of the volatility based ETN/ETF products are new.  Barclays’ VXX and VXZ oldsters started less than 4 years old—just a few months before the end of the 2008/2009 crash.  This lack of historical data over full market cycles makes it hard to assess the risks associated with new products—such as VelocityShares’ ZIV (medium term inverse volatility) and XIV (short term inverse volatility) funds which are less than 2.5 years old.

I have backtested ZIV starting from December 2005 (I ignored fees and treasury bill interest).  The results for this presumably tamer inverse volatility ETN, are shown below.  For a XIV backtest to 2006 see this post from Volatility Futures and Options.


Backtrack ZIV vs VIX, click to enlarge

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I was surprised at how volatile, and how low this hypothetical ZIV went during the recent bear market—losing 80% of its value from 2007  to 2008.   ZIV and XIV appear to be bull market only instruments and not suitable for buy and hold.   For one approach to timing investments in inverse volatility see Taming Inverse Volatility with a Simple Ratio.

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Friday, January 11th, 2013 | Vance Harwood
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  • Steve

    Thanks! Not the results I would have expected. From the results here, There doesn’t appear to be any reason to buy zix.

  • John Shepherd

    IMHO the backtest is flawed because VIX spiked in 2008 like it has never before. VIX hit 70+ in October of 2008, which I don’t think will repeat any time soon. It’ll probably take at least 15 years for VIX to head above 50. It does not happen that often. How about backtesting XIV starting from 2000 if that’s possible? The 2008 year was the worst year for the VIX and is therefore an anomaly. Vix has never spiked like that since its inception.

  • Yuman

    It is surprising indeed. I thought the value of ZIV comes from two contributors: the VIX futures price between 4 to 7 months and contango(80% of the time)/backwardation. Since VIX is mean-reverting, the effect of the former diminishes over time. From the chart, when VIX and SPVXMSTRcame back down to a previous levels, ZIV did not return to previous highs. Something else is eroding its value.

  • Vance

    Hi Yuman,
    The other factor might be path dependency. For example if VXZ went up 10% one day and then down 9% the next it would end up about where it started. ZIV on the other hand would end up 2% down. At some point I’ll try to analyze the data to see if that is the reason for this behavior.

    – Vance

  • Vance

    Hi John,
    I agree that the backtest is probably flawed, but not for the reasons you describe. The VIX (or the CBOE’s backward projection) of the VIX has been over 40 five times in the last 15 years. On May 21, 2010 the intra-day VIX reached 48.2–pretty close to 50. The 1987 crash would have had VIX levels in the neighborhood of 120–so overall I don’t agree we can say that 2008 was a one-of sort of event. I think the increased interconnnectedness of the world’s financial systems are making panics more likely rather than less.

    I do suspect that the 2008 crash seriously disturbed the term structure of the volatility futures–putting them into much stronger contango than they were before. I need to verify this, but I’m pretty sure that is the case. The next question is will this be a permanent change, or something that will fade away. My guess is that it will be persistent. An analogy is the volatility smile on option’s IVs that appeared after the 1987 crash and has never gone away.

    If the high contango situation continues with the medium term futures, then I expect ZIV to perform significantly better than the backtest would suggest. But I’m going to be trying to protect myself against those pesky VIX spikes.

    Unfortunately the volatility futures that these products are based on have only been trading since 2004, so backtesting earlier than that is not possible. Lack of history is going to be a problem for a while–especially if the underlying behaviours keep changing.

    – Vance

  • Ragu Vijaykumar

    What VIX futures months does ZIV track? Thanks – love your blog.

  • Vance

    Hi Ragu,
        ZIV is tied to the inverse of the 4/5/6/7 month futures.  As the 4th month is rolled off the 7th month is picked up.  The ticker for the index is SPVXMP:IND.   For a full list of ETPs and associated futures months see
    http://sixfigureinvesting.com/2010/12/volatility-tickers/.

    – Vance  


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