Originally posted July 18, 2011
Update: VZZB terminated in October 2012, consistent with the 1.5 years or less of life that I predicted below.
Barclays didn’t waste any time replacing its recently terminated VZZ ETN. The new fund, targeted at leveraged long performance relative to medium term volatility appears essentially identical to VZZ except for its new inception point (8-Jul-2011). Rather than follow daily percentage moves, Barclay’s inverse and leveraged funds behave like actual short or 2x leveraged position when they are created. The good news with this approach is that there is no path dependencies or compounding effects. The bad news is that the “participation rate”, or effective leverage changes over time and it usually isn’t in your favor. Right before VZZ was terminated its leverage was running in the 3.55X range, quite a bit hotter than its 2x inception rate. For a discussion on this effect on inverse volatility funds (XIV, IVO, XXV), see this post.
I backtested the new VZZB against its newly departed sibling VZZ in the charts below from late 2005 with the VIX index for reference. I included short histories/ backtests of the other two leveraged volatility ETNs—TVIX and CVOL in the first chart. TVIX is a 2X daily percentage leveraged ETN based on the same short term index that VXX uses, whereas CVOL is based on a 2X daily percentage of a rolling combination of 3rd and 4th month volatility futures with a variable short component on the S&P500 thrown in. I have only backtested CVOL back to the beginning of 2010. TVIX goes off the chart very quickly—it suffers severely from contango based erosion of its price.
VZZB backtest-big picture, click to enlarge
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Focusing on the VZZ / VZZB results, there is nothing too surprising about the VZZB. Pretty much the same shape, just shifted up. I think this chart suggests an overly optomistic picture on VZZB because contango was not as severe before 2008. I expect VZZB to last more than the 7 months that VZZ lasted but I doubt it will take longer than 1.5 years before it hits its $10 termination value.
VZZB-backtest, click to enlarge
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