Mimicking the VIX index

The Holy Grail of volatility investing would be an ETN or ETF that matched the movements of VIX—CBOE’s volatility index on the S&P 500.   As a hedging vehicle it would be nearly ideal—negatively correlated to fast moves of the S&P 500 with a stable floor during quiet times.  So far no one has figured how to economically offer a fund that does this.  Instead we have a potpourri of choices that sort-of  behave like the VIX  (see volatility tickers for the complete list).  For a detailed discussion of all the ways to go long on VIX see this post.

TVIX and CVOL are the two funds that have come closest to following the VIX in volatile times.   They are both 2X leveraged versions of short term volatility futures, but CVOL includes a short component in the S&P 500 intended to better match the VIX in volatile times.   In the last 10 days these two funds have done a very good job of matching the percentage moves of the VIX.

CVOL and TVIX perform in volatile times, click to enlarge

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The next chart, the 3 month story, shows the dark side of these two funds—a relentless undertow from the contango of volatility futures that makes buy—and—hold a suicide strategy with TVIX and CVOL.

VIX compared to TVIX and CVOL, click to enlarge

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Ugly.  This last chart shows the target—VIX over the last 3 years.   Mimic this and fortune will come to your door.

Three years of VIX, click to enlarge

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3 thoughts on “Mimicking the VIX index”

  1. Speaking of which:

    VXX has failed to fall as quickly as the VIX, and XIV has failed to rise as fast as VIX has fallen.

    This is a different environment we’re in compared to the past year or so.

    Reply
    • Actually I would expect this, but I haven’t looked closely at the data. Normally VIX’s percentage moves are about 2X of VXX in both directions in “fast” times and XIV would just be the % inverse of that. Are you seeing a divergence from that pattern?

      Reply

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