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
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.
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I fap to XIV chart.
So it really tracks the overall market and not the VIX? That’s what I seemed to notice in the the last month that I’ve watched this ETF.
Hi Tom, xiv tracks volatility futures, but it often does follow the market’s moves. –Vance
And what about the stock split and reverse split on XIV?
Do you know the terms and condition (such as if XIV price is below xx then it will be reversed split)?
Hi Lok,
From what I remember from the prospectus XIV can split or reverse split at any time. I think Velocity shares decided they were too expensive before, hence the 10:1 split. Now their volumes are high enough to get some attention–so I think it was a smart move. XIV assets are up to $300 million recently, so they are doing well–expect imitators to be announced soon.
— Vance
Hi Vance,
Another great post by you.
I just wondering with the 20% value termination rule, did XIV ever get terminated on 2008?
Did XIV ever drop more than 80% in a single day?
And what is mean reversion of volatility? I don’t understand it.
Keep up the good job Vance, can’t wait for your next post