USA Volatility Funds Categorized and Ranked


Friday, October 10th, 2014 | Vance Harwood

It’s been over 5 years since VXX, the first volatility exchange traded product arrived on the market.  Since then 36 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 22 (as of 24-Sept-2014).

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 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.  UVXY for example has had a compound annual growth rate of -93% since its inception in October 2011.

Rank Ticker Match VIX daily % moves Description AUM $M (Dec 2012) AUM
$M
(Sep 2014)
ETN / ETF(Options) Notes
1 UVXY Decent 2X short term 109 356 ETF
(Y)
2 TVIX Decent 2X short term 149 236.3 ETN  TVIX gets a new lease on life
Still has tracking error of about 1.5% on average
3 VXX Fair 1X short term 1180 1359.5 ETN
(Y)
4 VIXY Fair 1X short term 152 126.1 ETN
(Y)
5 CVOL Decent 2X short term (3-4 month) 5 5 ETN  Low AUM. Spreads not bad.
6 VIIX Fair 1X short term 11 7.5 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 $1.169 billion. There are two basic flavors of the hybrid funds, one type attempts to hold its value or even gain a little during bull markets but shine during big corrections / bear markets.  I call these the “Hybrid-long” funds, because they are strategically long volatility.  The funds that fall into this category are shown below:

Hybrid-long

Rank Ticker % CAGR since inception Description AUM $M (Dec 2012) AUM
$M
(Sep 2014)
ETN / ETF Notes
1 PHGD 7.0%
(Dec 2012)
Same as VQT 3 416 ETF(options)  Div Yield 1.6%,  Options added 30-July-2014
2 VQT 10.4%
(Sep 2010)
Mix of S&P 500 +  short term 394 640.5 ETN Details
3 XVZ -18.8%
(Aug 2011)
Mix of short and medium term vol 265 22.1 ETN Increased contango in mid term VIX futures has really hurt this fund
4 VIXH 11.2%
(Sep 2012)
S&P 500 + VIX calls 3 6 ETF



Given the lack of big negative market moves the last three years it’s not shocking that these funds haven’t  shown big gains, but I am surprised that the VEQTOR based funds (VQT & PHDG) have not done better given their high allocation into the S&P 500 (as high as 97.5%) during quiet markets.  Even allocations as low as 2.5% to long volatility have dragged returns down significantly.  In 2013 the S&P 500 went up 26.5%, while VQT went up 12%.

In June 2013 VelocityShares introduced two hybrid funds that have a different spin. They attempt to capture most of the gain in the general market, but have a long/short volatility component that should significantly reduce the drawdown during corrections / bear markets.   So far their  performance has been impressive with SPXH delivering a gain of 20% and the heavier hedged TRSK going up 16.9% since inception, compared to a S&P 500 gain of 27%.  For more on these new funds see  “Hedging the S&P 500“.

Hybrid-hedge

Rank Ticker % CAGR since inception Description AUM $M (Dec 2012) AUM
$M
(Sep 2014)
ETN / ETF Notes
1 SPXH 15.8%
(Jun 2013)
Mix of S&P 500 + 2x long -1X short       NA   52.6   ETF Div Yield  0.9%
Details
1 TRSK 14%
(Jun 2013)
Mix of S&P 500 + 2x long -1X short       NA   32.6   ETF Div Yield 1.0%Details

 

 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 not getting toasted when volatility spikes.

Rank Ticker % CAGR since inception Description AUM $M Dec-12 AUM
$M
Sep- 14
ETN / ETF (Options) Notes
1 ZIV +39.3%
(Nov 2010)
Inverse medium term 16 133.5
(8.3X growth)
ETN A medium term position provides much of the upside with much less volatility
2 XIV +45.5%
(Nov 2010)
Inverse short term 378 593.2
(1.56X growth)
ETN
2 SVXY +67.8%
(Oct 2011)
Inverse short term 82 198
(2.41X growth)
ETF
(Y)



The unremitting bull market the last couple of years has been very kind to the inverse volatility funds.   Things will get rough at some point—these are not buy and hold investments unless you have a stomach of steel. Alternatively have an exit strategy or an effective hedge strategy in place.  

 

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 starting in 2010 the contango in medium term VIX futures started being a significant drag on these funds.  Recently that drag has been in the 2% to 3% per month range. See VIXCentral for the current numbers.

Rank Ticker % CAGR since inception Description AUM $M Dec-12 AUM $M
Sep- 14
ETN / ETF(Options)
1 VXZ -30.9%
(Jan 2009)
Medium term 70 61.6 ETN
(Y)
1 VIXM -35.7%
(Jan 2011)
Medium term 44 43.2 ETN(Y)
2 VIIZ -35.8%
(Nov 2010)
Medium term 5 1.5 ETN
2 TVIZ -62.5%
(Nov 2010)
2X Medium term 2 .9 ETN



Zombie

I think these funds should be avoided.  They either have very low upside potential or a failed strategy.

Ticker Description Notes
IVOP Inverse  short term Very little upside (maximum price is $40), low leverage  (0.10)   No where to go
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)   No where to go



Friday, October 10th, 2014 | Vance Harwood

5 Comments

  • Comment by Eli — December 11, 2012 @ 11:07 am

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

  • Comment by Steve — December 12, 2012 @ 11:26 am

    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.

  • Comment by vance3h — December 14, 2012 @ 9:33 pm

    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

  • Comment by Dan P — May 18, 2013 @ 8:18 pm

    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

  • Comment by Vance Harwood — May 19, 2013 @ 8:45 pm

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

    Best Regards, Vance

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