ProShares’ SVXY and UVXY vs. VelocityShares’ XIV and TVIX


Updated: Mar 10th, 2017 | Vance Harwood | @6_Figure_Invest

ProShares was the first  Exchange Traded Fund (ETF) provider for volatility based fund.   The previous volatility entries from Barclays and VelocityShares were all Exchange Traded Notes (ETN).  Click on the underlined ETF   /   ETN for discussions on how how these types of securities work.  Proshares has done well, and currently is nearly tied with VelocityShares in terms of assets.

UVXY (2X  long) and SVXY (inverse daily percentage long)  track the same respective indexes as VelocityShares’ offerings: TVIX (2x long) and XIV (-1X short) .    All these funds are large enough that their bid/ask spreads and liquidity characteristic are very good.

The salient differences are:

  1. UVXY and SVXY have options available
  2. Tax treatment:   Because UVXY and SVXY explicitly hold VIX futures the IRS counts them as partnerships that need K-1 forms filed for taxable accounts at tax time.  The VelocityShares ETN’s tax treatment is the same as regular stocks.  On their website (point 1) ProShares elaborates:

    Volatility, Commodity, Currency and Managed Futures ProShares will invest in a range of derivative instruments, including futures and forward contracts. In general, open futures positions will be marked to market, with their capital gains and losses reportable on a Schedule K-1 as other income (loss) from section 1256 contracts. These generally result in 60% long-term and 40% short-term gains/losses on the investor’s tax return. The reporting of gains and losses may vary depending on the specifics of a contract.

  3. Credit risk:  Because ETF’s explicitly hold the underlying futures and swaps contracts that track the index their credit risk is lower than an ETN’s.  With ETN’s you are essentially depending on a single company (e.g, Credit Suisse in this case) to honor their debts.   All of the volatility ETN issuers are big banks with good credit ratings, so I think this risk is pretty small.   See Credit Risk and ETNs for more information.
  4. TVIX has systemic tracking issues.  Unlike UVXY which usually closely tracks its underlying index (^UVXY-IV on Yahoo Finance), TVIX often trades 1% to 2%  higher than its intraday value (^TVIX-IV).  Given the large swings in these securities this is not a huge issue, but it is a negative factor.  For a while it was unclear whether Credit Suisse was going to maintain TVIX (e.g., with reverse splits to keep it trading above $1), but now it appears they are committed to the product.
  5. XIV would terminate with a -80% daily move.  With PowerShare’s funds I can’t find any mention of termination criteria in the prospectus, except for the generic, “we can terminate whenever we want” clause.   With a short daily percentage volatility fund it is not unreasonable to imagine an extreme event doubling volatility on the long side wiping out the short side.  My assumption is that ProShares would terminate SVXY rather than allow its NAV to go negative.

UVXY and SVXY prospectus

For a complete list of available volatility ETFs and ETNs with links to associated indexes and information see Volatility Tickers.

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Friday, March 10th, 2017 | Vance Harwood
  • jones

    Guys, I need some help understanding the behaviour of vxx and backwardaion.
    I remeber the rule thumb that basically vxx should give half the yield of the vix index, for example vix going up 5 % gives ~ 2.5% in the vxx. With backwardation in place we could see days of +5 and +4 foe example. The question is what is going on when the vix goes down sharlpy but there is still backwardation? Last week there were days like -8 % of vix and -7% of vxx, where is the backwardation here? the spread between the first and second contract was getting smaller but the first contract is still higher (only today they got even),so I would expect a day of -8 % in the vix to give something like -3 to -4 % in the vxx, can you please explain to me the behaviour of vxx?

  • Hi Jones,
    I’ve noticed that VIX and VXX are not acting typically. These are not typical times. VIX has been at elevated levels for quite a while and backwardation has really been driving the value of VXX up. My sense is that options buyers/sellers are becoming significantly less nervous (or maybe just jaded), so the premium on options drops dramatically on up days. This leads to big drops in the VIX. The decrease in backwardation shows that the futures market is becoming less fearful of a big drop off–it appears they are more bullish than the options market.

    Bottom line, during a transitional time like this the rules of thumbs don’t seem to apply. The options market and the futures market are only loosely coupled, so there is no arbitrage that would keep them in sync with each other.

    I think the usual 50% factor is due to effective timeframe of VXX being 60 days and the VIX being 30 days. I know VXX is stated as being a rolling position with a 30 day outlook, but since the front month syncs up at expiration with VIX–which is a 30 day outlook, that the combination of the first and second month would give a longer effective outlook.

    I doubt the previous stuff helps, but that’s my muddled understanding.

    — Vance

  • Andrew Kuprat

    I’m hoping things will be getting back to normal soon. The 5-day moving average for XIV is about to top the 20-day moving average… first time since this crisis began…
    Andrew

  • Fernando

    Hi Vance,

    What opinion do you have about SVXY? What difference is between SVXY and XIV? I heard that ETFs is better than ETNs, but I don´t know why….

    Thanks

  • Hi Fernando,
    The differences between SVXY and XIV are small. The annual fee may be different and the termination process for SVXY is not specified in their prospectus–but like XIV these inverse funds can terminate if volatility jumps too much in a day. Practically the bid / ask price will probably be better with XIV because of its higher volume. The main difference between ETFs and ETNs is that with ETFs the actual securities are delivered as part of the share creation process, whereas ETNs only have money that goes back and forth. ETNs hedge the product internally, but there is no visibility into that, so that adds a element of risk (small in my opinion). ETFs have more complications with USA taxes, because you are dealing with futures/commodities. ETNs tax-wise are treated like bonds, so they have a simple tax treatment.

    — Vance

  • VIX enthusiast

    I’ve tried to short TVIX without success as my broker doesn’t offer shares for shorting. There’s no 2x inverse volatility ETF, right? Is there one on the horizon?

  • Hi,
    I’m not aware of any inverse 2X volatility funds right now, nor do I see any on the horizon. One barrier might be a termination issue. If you needed to terminate a -2X fund on a 80% down day that would only require a 40% move in VXX or its equivalent, which isn’t that unusual.

    Depending on the VXX price, IVOP can have leverage even higher than 2.0 (http://sixfigureinvesting.com/2011/10/deathwatch-for-barclays-ivop-short-volatility-etn/) , but now it is running close to 1:1.

    –Vance

  • artter

    Thank you for the article, great informationabout tax reeatments of UVXY an XIV.

  • wei liao

    Hi, I am wondering if that 60/40 tax treatment is for UVXY, SVXY option trading or ETP stock trading? Thank you for your article.