When Barclays ‘ VXX ETN first came out early last year I was pretty excited. Having an direct investment in a volatility product that didn’t have the time decay (theta) of VIX options was attractive. However, it turns out that price erosion on VXX is a huge issue—anyone that holds on for the long term becomes a loser. In spite of this, VXX has become a huge success, with an average volume of 9 million shares a day.
It’s way too early to tell, but Citigroup’s CVOL ETN is showing much less susceptibility to price erosion than VXX. Since November 15th, when CVOL started trading the VIX index has dropped 13.35%, VXX has dropped 18.5%, and CVOL, adjusted for its 2X leverage has dropped 12.7% —slightly less than VIX! Adjusted for its 2X leverage CVOL is not showing as much pop as VIX on big swings, but I would gladly give that up to avoid ongoing price erosion. If CVOL can keep this up, there will be little reason for investors to stick with VXX.