Update: Citigroup has halted new share creations for CVOL, so it should be avoided.
For a long time investors have been frustrated in their desire to directly invest in the VIX index. Now three ETNs, one by design, and the two other perhaps by accident are tracking (or out-performing) the VIX index on both a daily percentage move basis and for multi-day holding times.
UBS’ CVOL was designed to correlate well with the daily moves of VIX. It uses 2X leverage on the 3/4 month rolling volatility futures, and then adds a variable short S&P 500 position to give the ETN some extra kick on down days to better match the VIX. CVOL didn’t use the 1/2 month rolling volatility futures because contango imposes a heavy penalty on them when the markets are quiet—the 3/4 month futures don’t suffer as much. CVOL hasn’t really caught on so far in the market place, its daily volume tends to run below 40,000 shares and its bid/ask spreads are usually in the $0.10 range. The graph below shows CVOL compared to the VIX index on a daily percentage move basis since July 1st, 2011.
Historically the daily percentage moves of short term (1/2 month) volatility ETNs like VXX tend to be about 50% of the VIX index moves. Since VelocityShares’ TVIX and ProShares’ UVXY are essentially a 2X leveraged version of VXX, you might expect it to track the VIX index—and they do a pretty good job except for the effects of contango/backwardation.
TVIX compared to VIX on a daily percentage move basis. UVXY”s performance is essentially identical to TVIX’s.
While the daily percentage correlation is important, unless you’re day trading volatility (shudder) the more important attribute would be the results of holding these ETNs for a few days. In that case how well would they track to the VIX index? The chart below shows how $1000 invested in each of these starting July 1st,2011 would fare.
CVOL did the best in tracking the VIX index itself. VXX lagged but eventually caught up due to the sustained period of backwardation for the 1/2 month rolling futures. TVIX on the other hand, skyrocketed during this panicky time. A doubled benefit from backwardation was part of the gain, but the trend lines on the chart below suggests there are other factors. I suspect the rest is from the compounding effects of 2X leverage.
TVIX and UVXY look like the vehicle of choice if you want to bet on VIX’s moves during times of high volatility—it matches VIX’s daily moves well and greatly benefits from backwardation.
- Using the VIX Futures Term Structure to Predict Volatility ETP Prices
- Volatility ETP Price Projection Service
- Is Shorting UVXY, TVIX, or VXX the Perfect Trade?
- How Does TVIX Work?
- Backtests for Popular Long & Short Volatility Exchange Traded Products
First posted: Thursday, September 29th, 2011 | Vance Harwood