USA Volatility Funds Categorized and Ranked


Monday, January 28th, 2013 | Vance Harwood

It’s been almost 4 years since VXX, the first volatility exchange traded product arrived on the market.   Since then 34 additional funds, using both Exchange Traded Notes (ETNs) and Exchange Traded Funds (ETFs) structures have been introduced.  Terminations and closures have whittled that list down to 20 (as of 10-Dec-2012).

The remaining funds can be segmented into five major categories:

  1. VIX Trackers
  2. Hybrid Strategies
  3. Inverse Volatility
  4. Medium Term / Volatility Hedges
  5. Zombies

Below I’ve collected and to some degree ranked the funds within each of these categories.  I’ve tried to be analytical about this, but I don’t pretend to be unbiased. I think everyone carries bias whether they admit it or not.  The factors that seemed preeminent when ranking were:

  • Does the fund do what the user expects?
  • Is the fund big enough to have reasonable bid/ask spreads and be an attractive business for the company to support?
  • Is the fund closely tracking its index?

I included other data (e.g., ETN vs ETF, option availability) that didn’t significantly impact my rankings, but might be useful information.  For example, I believe all the volatility ETFs are considered by the IRS to be 1256 contracts, so they require K-1 filings for taxable accounts.   For more information on all of these funds, including company websites and fund prospectus see volatility tickers.

VIX Trackers

In this segment, the user wants the fund to track the percentage moves of the CBOE’s VIX index as closely as possible.  Other than impossibly slow learners, everyone else has figured out that these funds are only suitable as very short term investments (days at most) because they are typically ravaged by the roll losses associated with contango in the VIX futures that underlie these funds.

Rank

Ticker Match VIX daily % moves Description Assets $M (Dec 2012)

ETN / ETF

(Options)

Notes

1

UVXY Decent 2X short term

109

ETF

(Y)

2

CVOL Decent 2X short term (3-4 month)

5

ETN

3

TVIX Decent 2X short term

149

ETN

 TVIX gets a new lease on life   Tracking still not working well.

3

VXX Fair 1X short term

1180

ETN

(Y)

4

VIXY Fair 1X short term

152

ETN

(Y)

5

VIIX Fair 1X short term

11

ETN

 

Hybrid Strategies

After a late start volatility funds that blend long and short volatility positions have done well, pulling into second place with combined assets of over $650 million.  These funds attempt to hold their value, or match the market during sideways/bull markets while significantly outperforming the general market during downturns.

Rank

Ticker Perf. Description Assets $M (Dec 2012)

ETN / ETF

Notes

1

VQT Decent Mix of S&P 500 +  short term

394

ETN

Details

2

XVZ Fair Mix of short and medium term vol

265

ETN

Increased contango in mid term VIX futures has really hurt this fund

3

VIXH New S&P 500 + VIX calls

3

ETF

3

PHGD New Same as VQT

3

ETF



Inverse Volatility

It was only natural that funds emerged to take advantage of the painful erosion that VIX tracker funds suffer most of the time.  Of course you can short VIX trackers directly, but they are often tough to borrow, many investors can’t (e.g., in an IRA) or won’t short them.  In addition, without re-balancing, a successful short position loses leverage.  These inverse funds re-balance daily, so their leverage stays at -1X.   The challenge with an inverse position is avoiding getting toasted when volatility spikes.

Rank

Ticker

Perf. 2012 YTD

Description

Assets $M (Dec 2012)

ETN / ETF (Options)

Notes

1

ZIV

+93%

Inverse medium term

16

ETN

A medium term position provides much of the upside with much less volatility

2

XIV

+183%

Inverse short term

378

ETN

2

SVXY

+179%

Inverse short term

82

ETF

(Y)

 

Although a factor, I don’t consider the asset size of a fund (e.g., ZIV in this case) as a big differentiator.  Unlike small cap stocks, if the securities underlying an ETF/ETN have good liquidity (very much the case for VIX futures), then the asset size of the fund itself is not especially  important.  Smaller funds will have wider bid/ask spreads, but they will be able to handle good size orders without significant price distortion. 

 

Medium Term / Volatility Hedges

 The medium term volatility funds invest in the 4 to 7 month VIX futures.  They used to be a good way to bet on longer term volatility trends, or to hedge short positions in short term volatility.  However in 2010 the contango in medium term VIX futures started being a significant drag on these funds.  Recently that drag has been in the 3% to 5% per month range.

Rank

Ticker

Performance

YTD 2012

Description Assets $M (Dec 2012)

ETN / ETF

(Options)

1

VXZ

-53%

Medium term

70

ETN

(Y)

1

VIXM

-53%

Medium term

44

ETN

(Y)

2

VIIZ

-51%

Medium term

5

ETN

2

TVIZ

-80%

2X Medium term

2

ETN

 

Zombie

I think these funds should be avoided.  They either have very low upside potential, a strategy that is going nowhere, or not tracking its index well.

Ticker Description Notes
IVOP Inverse  short term Very little upside (maximum price is $40), low leverage  (0.10)
XVIX Mix of medium term and short position in short term Medium term contango erodes away any gains
XXV Inverse short term Very little upside (maximum price is $40), very low leverage (0.04)

 

 



Monday, January 28th, 2013 | Vance Harwood
  • Eli

    We probably have the same biases…
    I agree completely with your ranking.

  • Steve

    I had high hopes for XVIX.  Unfortunately, as you suggest, the increased medium term contango is kililng the product.  Interestingly, and I guess predictably, the same change that hurt XVIX has really put a wind to the back of ZIV.

  • vance3h

    Hi Steve, In addition to XVIX’s problems it’s distressing to see XVZ get eroded too. I can see a place for “actively managed” volatility funds that tweaked their strategy once or twice a year based on the prevailing term structures. Setting these parameters once by backtesting is a flawed strategy.

    – Vance

  • Dan P

    Vance,

    Thanks for the great site. One thing to mention is that Powershares states in PHDG FUND DETAIL bullet points. * No K-1, issues 1099.

    invescopowershares.com/hedge

    Dan

  • http://www.sixfigureinvesting.com/blog Vance Harwood

    Hi Dan, Thanks for the info. I guess holding futures doesn’t necessarily require K-1 treatment.

    Best Regards, Vance