Backtests for Popular Long & Short Volatility Exchange Traded Products

Thursday, April 23rd, 2015 | Vance Harwood

I have generated the end of day trading day values for the most  popular long and short volatility Exchange Traded Products (ETPs) for March 26th, 2004 through December 12th, 2014

These ETP histories are required if you want to backtest various volatility strategies through the quiet times from 2004 to 2007, or the 2008/2009 crash.  The chart below shows the simulated values with a logarithmic vertical axis so that you can see a reasonable amount of information for each fund.


The table below shows how much $1000 invested in each of these funds on March 26th, 2004 would have been worth on October 15th, 2013:
Symbol $ Value
TVIX $0.00012
UVXY $0.00014
VXX $2.10
VXZ $217
ZIV $1565
XIV $17865


The algorithms for generating these ETPs values are documented in the prospectuses for the various volatility ETNs and ETFs.    Barclays’ VXX/VXZ fund prospectus is a good example.   See Volatility tickers for the current universe of  USA based volatility ETPs and their associated reference indexes.    The futures settlement data required for these calculations is available on this CBOE website—in the form of 100+ separate spreadsheets.  To make the calculation of the indexes underlying the ETPs tractable  I created a master spreadsheet  that integrates the futures settlement data into a single sheet.  See this post for more information about that spreadsheet.

With the exception of TVIX—which has had severe tracking problems since early 2012 my simulated values very closely track the published indicative values (IV) of the funds.  Barclays provides a full set of IV values for VXX and VXZ—my simulation tracks them within +-0.04% and +-0.025% respectively.   Sampled IV values for the other funds give error terms of  +-0.2% for Proshares UVXY,  and for VelocityShares XIV and ZIV +-0.2% and +- 0.01% respectively.   My TVIX simulation tracks sampled IV values within +2%/-4%.

If you need simulated intraday open, high, low values also checkout this post.

These ETP prices reflect the contribution of 91 day treasury bills on their overall performance.   Thirteen week Treasuries yields averaged 0.05% in 2013,  but in February 2007 they yielded over 5%— things have changed a bit…   The simulated ETP values do  include applicable fees which vary from fund to fund.   The fee calculation is surprisingly difficult.  For more on that see Backtest on VXX Including Annual Fees

I am making these 6 simulation spreadsheets (values only, no formulas)  available for purchase, individually, or as a complete package. The VXX package is also available here.   If you cannot see purchase information immediately below then please click this href=””>link to the stand-alone post and look at the bottom of the page.

For more information on the spreadsheets see readme.

If you purchase the spreadsheet  you will be eventually be directed to paypal where you can pay via your paypal account or a credit card. When you successfully complete the paypal portion you will be shown a “Return to Six Figure Investing” link.    Click on this link to reach the page where can download the spreadsheet.  Please email me at if you have problems, questions, or requests.

When You Think Your Exchange Traded Fund is Broken…

Wednesday, April 22nd, 2015 | Vance Harwood

When you thing your ETF/ETN is broken...
Frequently I see people complaining that their Exchange Traded Fund (ETF) or Exchange Traded Note (ETN) is broken. Occasionally they’re right, but most of the time they’re not.  Before complaining, here are some things to look at:

  1. Are you looking at the right index?
    • All Exchange Traded Products (ETPs) track an index, which is identified in their prospectus, and in the fund’s fact sheet.   Don’t assume what the index is.  For example, the index that VXX tracks is not the CBOE’s VIX® , and UVXY the 2X volatility fund is not designed to track 2X the VIX.
    • None of the volatility funds track the VIX, they all use other indexes, because the VIX itself is not investable.  Some funds (e.g., UVXY, CVOL) do a semi-decent job of tracking the VIX in the short term, but nobody does a good job in the medium to long run.  In fact it’s a killing field.
    • Investigate the index once you’ve determined what it is.  It’s often not easy; sometimes even getting quotes on indexes is hard.  But similar to the hunter’s credo of eating what they kill, investors should understand what they trade.
  2. Is the fund leveraged/geared (e.g., 2X, 3X), or an inverse fund?
    • Leveraged or inverse funds typically do a good job of delivering their target performance on a daily basis, but usually fall far short with longer time frames.  The reason is compounding error, or path dependency.  It erodes the value of these funds in choppy markets.
    • For example if a non-leveraged fund (e.g., SPY) goes up 10% one day and down 9.09% the next it ends up even.   However the 2X fund (SSO) and the inverse fund (SH) both end up down 1.8%
      • 2X Fund: (10*(2*10%)=12, 12*(2*-9.09%) = 9.82
      • -1X Fund: (10* (-10%) =9,  9 *(+9.09%) = 9.82
  3. What are the timestamps of the quotes you are looking at?
    • Unless your fund is very active the quote you’re using might be older than you think.  For example the fund’s closing value might reflect a trade that happened hours before market close.  If you look at an intra-day chart of your fund including volume you should be able to see when the trades occurred and the quotes updated.  Typically the intraday indicative value (“IV”) quote is a more accurate way of getting the actual fund value. It’s updated every 15 seconds during market hours.
    • The IV quote tickers are not standardized.  Yahoo finance uses a “^” prefix and a “-IV” suffix to get the IV value (e.g., ^VXX-IV).  For more on IV quote symbols see Trading ETFs Without Getting Fleeced.
  4. Are the markets you’re comparing closing at the same time?
    • VIX futures markets at the CBOE Futures exchange trade for 15 minutes after the equities markets close.   The volatility ETPs are based on volatility indexes that are based on futures settlement values.  Eli from VIX Central points out that these settlement values can come out well after 4:15.  The final IV update for the day appears to reflect these late settlements—giving us the real closing value for the volatility funds.
  5. Is the trading value of the funds diverging significantly from its index or IV value?
    • If this is the case, your fund might be broken, but before we pursue that there are a couple thing to check:
      • Are the markets for the underlying assets closed (e.g., Asian or European stocks)?  If so those indexes can’t update so some divergence during USA trading hours should be expected.
      • Are the securities for the underlying assets illiquid or rarely traded (e.g., high yield corporate bonds)?  If so the trading value might reflect the market’s estimation of what those assets are worth, rather than the last trade, or published bid/ask quotations.

If you’ve checked through all the items above and things still look wrong your fund may indeed be broken.  Historically the only pathology for ETF/ETNs is to have their share creation process halted or somehow limited.  Some of the stated reasons for doing this are:

  1. Market closures (e.g., the Egyptian stock market EGPT closed for 2 months in 2011)
  2. Regulatory hurdles, where permission to issue new shares is delayed UNG,      UNL,DNO
  3. Issuer “internal limits on the size of ETNs”, TVIX
  4. Commodity  position limits, where the exchanges won’t allow the funds to accumulate more contracts UNG
  5. Self-imposed market cap limits AMJ

In all these cases the share redemption process has been left intact.  In practice if share creation is stopped and redemption is working the ETP’s price can rise higher than the index, but not drop significantly lower than the index.   Both UNG and TVIX were expensive object lessons for the people that didn’t understand this.

NYSE EURONEXT has a good webpage that lists all the funds that currently have suspended or put limits on share creation.

Credit Suisse’s TVIX has restarted limited share creation processes, but its requirements are so expensive the market makers still allow the fund to climb as much as 15% higher than its IV value—I consider that broken.

TVIX Gets a New Lease on Life

Friday, February 22nd, 2013 | Vance Harwood

On Friday, December 14th, Credit Suisse announced a 10:1 reverse split of TVIX, effective the 21st.  I had pretty much given up on TVIX because its price had slid way past the logical reverse split point and has traded below $1 for the last 16 trading days.  However instead of fading to black TVIX is now back into a reasonable trading range.

In February 2012 Credit Suisse got nervous about the rapid growth and size of TVIX, and temporarily pulled the plug on new share creation. Market makers need the share creation process to keep the price of Exchange Traded Products (ETPs) from rising too far above their Net Asset Value (NAV).  Typically if the ETP’s price floats too high they short the security with the knowledge that the ETP issuer is usually happy to issue new shares at the NAV price they can buy to cover the short—guaranteeing the market maker a risk-free profit. The selling naturally drives the price of the security down.

Credit Suisse restarted partial share creations a month later, but in the interim the NAV of TVIX had plummeted 56%—while the market price of TVIX only drifted down 15%. The resultant correction vaporized $277 million of TVIX value in a day. Subsequent tracking still wasn’t great—Credit Suisse’s partial solution was expensive for the market makers and only profitable for them to short the ETP if it was 5% to 15% above the NAV price—better but still a horrible tracking percentage.

Apparently Credit Suisse had been working on the share creation problem. The TVIX prospectus was revised in early November and starting November 23rd, TVIX’s tracking improved considerably.  The chart below shows its tracking error alongside of ProShares’ UVXY— its closest competitor.

TVIX and UVXY % Tracking to their NAV

TVIX and UVXY % Tracking to their NAV


When TVIX’s tracking error dropped suddenly on November 23rd it appears that it spooked some investors into dumping their UVXY—messing up its tracking for an hour or so until its market makers pulled it back into line.

Unfortunately this improved tracking was a short term thing.   A week or two after the split  TVIX’s tracking error returned to the 5% to 7% range.  While not a killer, I’m hard pressed to see any advantages of TVIX over ProShares’ UVXY, its well behaved ETF based equivalent.

Year to date in 2012 TVIX is down an astonishing 97%, but it was even a worse year than normal for 2X leveraged volatility funds. Next year I project a 90% loss, so TVIX might not require reverse splitting again until around December 2013.

TVIX’s Fate—Fade to Black?

Tuesday, December 17th, 2013 | Vance Harwood


TVIX is alive, and reasonable well.  For information about TVIX’s recent reverse stock split see this post


Things have not been well with TVIX since Feb 21st, 2012 when Credit Suisse stopped the share creation process.   In late March 2012 a modified creation process was put in place, but that has only been partially successful—the TVIX price has often been floating 5% to 10% above its Indicative Value (IV).  This is much better than the 90% premium we saw in early March, but it’s still not good.  The IV tracks the underlying index that exchanged traded products (ETP) are designed to follow.  TVIX’s competitor, ProShares UVXY for example usually trades within 1% of its IV value.

When Credit Suisse pulled the plug on share creations they cited “internal limits” as the reason.   The chart below from the Index Universe ETF Fund Flow Tool shows TVIX’s inflow/outflows in 2012.


TVIX’s 2012 Fund Flows

In January and February TVIX had net inflows of $642 million dollars as its volume increased to surpass Barclays’ VXX as the volume leader in volatility ETPs.  Normally this would be great news, but with a 2X leveraged fund like TVIX there’s a not so pleasant obligation that comes with growth.  In order for a 2X leveraged fund to maintain its leverage factor it needs to adjust its market exposure every day.  If the daily value of the underlying index (SPVXSTR in this case) goes up 10%, then Credit Suisse must increase its investment by 20% of the fund’s assets under management (AUM) that same day. See Under the Hood of a Leveraged ETP for an example of how this works with leveraged and inverse funds.

Volatility indexes tend to be…well, volatile.  In the last six years SPVXSTR experienced daily spikes of: 24%, 21%, 20%, 19%, and three of 14%.   If there was another worst case jump of 24% in the SPVXSTR index (27-Feb-07) Credit Suisse would need to invest an additional 48% of the current assets of the fund to maintain the 2X leverage factor.  With AUM of $690 million (22-Feb-2012 actual) this would require a $330 million incremental investment at market close to rebalance the fund.  And of course, volatility begets volatility so the next day’s jump could be similar or worse.

With TVIX’s AUM nearing $700 million, and growing rapidly it’s not shocking that Credit Suisse pulled the plug on creations to put a lid on this exposure.

Some people have speculated that Credit Suisse balked because traders were front running the big end of day VIX Futures buy/sells associated with daily rolls and rebalancing.  I don’t think this is a factor—Credit Suisse doesn’t care what SPXVSTR closes at, as long as their funds track it they’re happy.

I think the underlying problem that spooked Credit Suisse was the credit risk of the swaps that are used to hedge their positions.   My understanding is that volatility ETN vendors like Credit Suisse typically don’t directly manage the nuts and bolts of index hedging, instead they outsource that function to 3rd parties via volatility or variance swaps.

That’s ok until a 3rd party defaults on a swap—then the heat is on Credit Suisse.  Since ETNs are senior notes Credit Suisse is obligated to honor them—or go bankrupt.   I don’t see a mechanism for passing those losses directly to the TVIX shareholders via the share price.

When faced with risks of this magnitude Credit Suisse wanted lower risk swaps—which are naturally more expensive.   Rather than absorb these costs internally, which would likely have rendered TVIX unprofitable, they opted to push the problem onto the market makers.

So when Credit Suisse resumed share creation they added this language regarding hedging instruments, which includes swaps, to their prospectus:

 “…will be on terms acceptable to Credit Suisse, including the counterparty meeting Credit Suisse’s creditworthiness requirements, margin requirements, minimum size and duration requirements and such other terms as Credit Suisse deems appropriate in its sole discretion.”

Apparently these terms are expensive enough that market makers can only profitably create shares if TVIX is trading 5% to 10% above its IV price.  This is a bad situation because TVIX can fluctuate between its IV value and 10% above for no reason.

So how does ProShares’ UVXY, an Exchange Traded Fund (ETF) which offers the same 2X leverage on short term volatility deal with credit risk?   ETFs don’t do internal hedging, they always require the market makers to provide the underlying securities/hedges in exchange for new shares.   Swap defaults are a possibility for ETFs too, but if it occurs it will be reflected in the share price.  To reduce this risk ProShares requires daily marked to market collateral and only works with large, well-capitalized, well established financial institutions like Deutsche Bank, UBS, and Goldman Sachs.

But the bottom line is that the shareholder takes the default risk, not the ETF.  For more on ETF/ETN credit risk see this post.

If Credit Suisse has not figured out how to fix TVIX so that it tracks its index acceptably, they might want it to go away.   They can do this by doing nothing.

Without frequent  reverse stock splits TVIX would be eroded down towards zero by contango.  If there aren’t any significant volatility spikes TVIX tends to decay around 90% per year, so it wouldn’t take too long before  it started trading below $1.  My understanding is that because TVIX is based on futures  it may not be subject to the NYSE delisting rules, but at sub dollar prices it is not a mainstream product.

Fade to black.

TVIX Still Not Tracking Well

Thursday, May 21st, 2015 | Vance Harwood

In April 2012 Credit Suisse announced that they would resume limited share creation, but TVIX is still not accurately tracking its indicative value (IV).  An April 11, 2012 intra-day quote gave TVIX’s bid at 9.39 while its IV on Yahoo Finance (symbol ^TVIX-IV) was 8.21—a 6.4% difference.   By comparison ProShares’ UVXY, which has the same performance goals as TVIX was at 20.30, with an IV of 20.25— a 0.25% difference.

This is not good.

If things were working well, authorized participants (APs) would be able to short TVIX, walk over to Credit Suisse’s doorstep, purchase TVIX shares at the IV price to cover their short, and pocket a cool $1.18 per share with no risk. They would if they could.

So where is the problem?   Are there no shares available to short?   I doubt it, although I think TVIX shares were exceeding hard to borrow right before Credit Suisse made their limited creation announcement March 22nd.

I suspect the problem is on the share creation side.  Credit Suisse can require the APs to supply swaps instead of cash as part of the share creation process—likely with challenging conditions.   In their press release Credit Suisse takes carte blanche in their ability to specify the deliverables:

“..will be on terms acceptable to Credit Suisse, including the counterparty meeting Credit Suisse’s creditworthiness requirements, margin requirements, minimum size and duration requirements and such other terms as Credit Suisse deems appropriate in its sole discretion.”

If these terms are onerous enough to create a significant premium on the appropriate swaps then TVIX’s price behavior starts to make sense.  The chart below shows the recent relationship between TVIX’s market price and its indicative value.

TVIX Premium at Close


If expensive swaps are the problem this chart suggests TVIX’s premium will top out in the 5% to 10% range when TVIX is flat or declining.   If volatility is climbing then the premium will drop, and never go very far negative because the share redemption process is still working well.  Credit Suisse is happy to give the APs cash at the IV price in exchange for TVIX shares…


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