Backtests for Popular Long & Short Volatility Exchange Traded Products

Friday, February 28th, 2014 | 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 January 27th, 2014

  • TVIX    VelocityShares Daily 2x VIX Short-Term ETN
  • UVXY  ProShares Ultra VIX Short-Term Futures ETF
  • VXX     Barclays S&P 500 VIX Short-Term Futures ETN
  • VXZ     Barclays S&P 500 VIX Mid-Term Futures ETN
  • XIV     VelocityShares Daily Inverse VIX Short-Term ETN
  • ZIV     VelocityShares Daily Inverse VIX Medium-Term ETN
  • SVXY  ProShares VIX Short-Term Futures ETF
  • VIXY  ProShares  Short VIX Short-Term Futures ETF

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.

Pop-Vol-ETPs

 

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.

My simulated values very closely track the published indicative values (IV) of the funds except for VelocityShares’ TVIX—which has had severe tracking problems since early 2012.  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%.

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 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 vh2solutions@gmail.com if you have problems, questions, or requests.



Under the hood of TVIX and XIV—Cause for Concern

Wednesday, October 3rd, 2012 | Vance Harwood
 

Since Credit Suisse’s recent pause on TVIX share creations I have been trying to figure out some of the hedging / rebalancing dynamics underlying the current crop of volatility ETNs and ETFs.  Traditional equity ETFs like SPY, the S&P 500 index tracking  fund don’t  require much behind-the-scenes action.   Shares are created or redeemed in conjuction with baskets of securities changing hands.  The only dynamic part is when the S&P index itself adds or deletes stocks or perhaps shuffling of shares for tax purposes.

Volatility ETNs/ETFs on the other hand use VIX futures, which themselves have only been in existence 8 years, as the underlying securities.   Rather than statically holding onto these futures all volatility funds must continually roll their futures holdings from nearer month maturities to further out months so that their effective time maturity stays constant.  In addition, except for Barclays’ offerings all inverse & leveraged volatility funds are designed to track the daily percentage move of their underlying index.  This attribute requires the funds to rebalance their holdings as often as daily to maintain their percentage tracking.     ETNs have some leeway on how they do this management of the underlying futures.  They for example can adjust the amount of hedging they have to do based on their overall portfolio (e.g., assets in XIV would partially hedge TVIX).

ETFs (e.g., ProShares UVXY 2X short term) require actual futures to change hands when shares are created or redeemed, but once held by the ETF provider they still have to do the dynamic rolling / rebalancing on the portfolio.  What you get back will be different than what you put in…

I’m concerned that the volatility ETN/ETFs are moving the market  itself with their trading: futures prices, term structure, and perhaps even the IV skew of SPX options.    It can’t help that the futures market rebalancing required to hedge vega, the volatilty of volatility, is in the same direction for both long funds like TVIX as it is for XIV and other inverse funds—the vega risk does not offset.    While scary, my analysis on the topic suggests that big VIX futures purchases probably have an overall neutral effect on the market.  The hedging activities of the market makers tend to offset the effects of VIX futures creation.

Volatility is a new asset class, and clearly it has gotten big enough to start showing growing pains.   I’m confident that the quest for profits will lead to solutions for these problems, but it will take some time to sort this all out.  I applaud Credit Suisse for having the internal controls and the willingness to take action when they saw the asset size exceed their limit.

 



XIV during the 2008 Crash

Wednesday, September 25th, 2013 | Vance Harwood
 

XIV has only existed since November 2010, so we are dependent on simulations for guesses on its performance before that.   The index that XIV is based on goes back into the 2005 time frame, so I have the data I need to backtest XIV for the 2008 crash.    My simulations show a close  match to actual XIV values (see this post) so I have a lot of confidence in my approach. Of course, if we had had XIV back in 2008 the whole course of history might have changed—but probably not.

I have used the pre-split values of XIV to make the chart easier to read.  To compare to the current 10:1 reverse split values, divide the XIV values by 10.

XIV during 2008/2009 crash, click to enlarge

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As you would expect, XIV gets hammered—to the tune of 83% in the first phase of the crash.   XIV hits bottom the 20th of November 2008, which was 131 trading days into the 487 days of the crash—about 25% in.   Because this drop was spread out over time XIV would have never gotten close to its one day 80% drop termination event.  See this post for more information on XIV termination.  The S&P 500 didn’t bottom out until 4 months later in March 2009 which was about 200 trading days in.

For the four months from the XIV bottom until March of 2009 the simulated XIV is basically flat.  The twin forces of mean reversion of volatility, and backwardation of the volatilty futures contracts cancelling each other.  Only after we entered into the bull market did XIV start its sustained climb.



Is XIV behaving correctly?

Thursday, August 25th, 2011 | Vance Harwood
 

In spite of its name, XIV is not the inverse of the VIX index—it is the daily percentage inverse of a index called SPVXSP, which you can monitor on Bloomberg here.  This index very closely tracks the same index that VXX uses, SPVXSTR.

Last week XIV did not track VXX’s daily moves particularly well.   There has been a lot of speculation about what was causing this disruption—ranging from turmoil in the futures markets, XIV’s daily re-balancing, to the heavy backwardation in the soon-to-expire August volatility futures.

Below I have ploted VXX and XIV against the values they should have based on the index:

VXX & XIV vs SPVXSTR, click to enlarge

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Things do not look seriously out of wack.  Most importantly, we aren’t seeing a divergence between the index and the VXX/XIV prices.  Daily errors are being compensated for over time. The next graph shows the daily VXX/XIV divergence from the index in percent.   The interesting thing here is that VXX is having trouble tracking too—it’s just in the positive direction.

VXX and XIV tracking error, click to enlarge.

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Looking at these graphs I’m inclined to say that the tracking problems are not specific to XIV, but rather due to the volatility/disruption of the futures market associated with the S&P downgrade.

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IVOP and XIV termination events

Monday, January 21st, 2013 | Vance Harwood
 

In the prospectuses for IVOP and XIV, there are some disconcerting discussions about termination events. In the case of IVOP, it occurs if its value drops below $10 and for XIV it is triggered if the daily percentage drop exceeds 80%. I did some digging into these events to try and figure out how likely they are to occur.  If you’d like to read a more general discussion about these two ETNs you can read this post.

First of all the IVOP and XIV provisions for termination/acceleration relate to volatility futures not the CBOE’s VIX index. The VIX relates to the instantaneous implied volatility of the S&P 500—which is a different thing. Volatility futures have contracts with different expiration dates. Typically the further out their expiration dates (e.g., 6 months from now), the slower they react to the day-to-day moves of the market. IVO and XIV are based on the two futures contracts that are closest to expiration, the administrators for these funds adjust their positions in these contracts daily to achieve an effective average time till expiration of 30 days.

VXX does the same thing, except it is trying to be long volatility, not short/daily inverse % of volatility. When trying to understand IVOP or XIV you can view them as being a short position in VXX (IVOP), or tracking the opposite daily percentage move of VXX (XIV).

VXX is not as volatile as the VIX index. On a day with sharp market moves VXX will typically move about half the percentage move of what VIX does. VXX can still make big moves however—one day during the May 2010 Flash Crash, it jumped almost 25%—the VIX on that day jumped 46%.

Now we can talk about termination / acceleration. I think it is reasonable to assume that the goals of the ETN providers in including these measures are to:

  • Prevent the ETN value from going negative (they specify in these prospectuses that the value will stay positive)
  • Protect the provider from undue market risk in hedging these products during volatile times

IVOP is essentially a short position in VXX, and Barclays doesn’t want to ever lose more than was put into it, so they liquidate the fund if it drops below $10 on the market. This termination would occur if VXX climbs 50% above its value when IVOP was created—jumping from $41.55 to approximately $63.

With XIV termination (or “acceleration” in marketing speak) relates to daily percentage moves. If VXX jumped more than 100% in a day, then if VelocityShares didn’t terminate XIV its notational value could go to zero.   They avoid this particular unhappy situation by terminating the fund if the daily move of VXX is 80% or more—although losing 80% in one day would still be plenty traumatic.

Just to be clear, these funds aren’t tied directly to VXX, but rather the underlying futures contracts, but I believe VXX is a good proxy for the situation.

The termination risk for XIV appears to be limited to market crashes worse than the Flash crash. Two examples that come to mind are the 2009 crash and the October 1987 crash. VXX didn’t exist for either of these. I have analyzed VIX data (or simulated data) since 1992—there were 20 days with VIX jumping over 30% (previous day close to intraday high) during that period. The highest percentage jump over that period was 70.5% on February 27, 2007. There were three days with VIX jumps over 30% in the 2008/2009 crash, and during the Flash Crash.

If VXX had existed during this time span, and held to its typical behavior of 50% of VIX’s move it looks like the XIV termination event would not have occurred, but obviously it would have taken heavy losses on those days.

The termination risks for IVOP (and its fallen sibling IVO) are obviously higher.   All it takes is an absolute 50% rise in the SPXVSTR index from its value at IVOP’s inception to kill the fund.

In IVO and IVOP’s case it matters when the fund was initiated, because VXX going up 50% over the case of a correction/crash is common.  IVO started January 20th, 2011, when the VIX index was a relatively low 18.   The VIX index at IVOP’s inception was at 31,  so the timing seems to be better—assuming we don’t go into a 2009 style crash in the next 6 months or so.

If you are investing significant amounts of money in these products it looks prudent to at least hold some OTM VIX or VXX  calls. These would provide some insurance against these infrequent, but dramatic events.

Thanks to Steve, who commented on the first version of this post pointing out that the ETN providers were probably not looking out for the investor, but rather for their own hides in incorporating these termination events.

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