How Do Bitcoin Futures Work?

The CME and Cboe/CFE, two large, well respected, USA regulated futures exchanges, recently started trading Bitcoin futures. These venues make it possible to trade on Bitcoin’s value without being exposed to the uncertainties of the mostly unregulated Bitcoin exchanges. To understand Bitcoin futures you need to recognize, among some other things, that these futures are not in the business of predicting Bitcoin’s price. Bitcoin Futures are …

Read moreHow Do Bitcoin Futures Work?

How do VelocityShares’ EVIX and EXIV Work?

In May 2017 VelocityShares introduced two volatility funds, EXIV and EVIX, which track European volatility futures.  In digging into these funds I’ve encountered a dense mashup of the familiar and the foreign.  The differences between European Volatility futures and VIX futures are relatively small so it’s reasonable to view EXIV and EVIX as close cousins of ProShares SVXY and Barclays’ VXXB, however, these funds depend …

Read moreHow do VelocityShares’ EVIX and EXIV Work?

How Does VMIN Work?

Update 

As of March 7th, 2018 VMIN will shift its trading strategy to use longer-term VIX futures with 3 to 5 months until expiration in addition to it holdings of short term volatility Exchange Traded Funds.  I’m estimating that this new strategy will result in a leverage factor of around -0.53X of the short term index futures index SPVXSTR that VXX is based on. This change was likely in response to the events of February 5th, 2018 when a massive VIX futures spike occurred in the last 30 minutes of trading. This change to VMIN will make it less susceptible to a termination event if VIX futures were to increase 100% or more from the previous day’s close.  This leverage change will likely reduce VMIN’s performance when VIX futures are in contango and reduce its price decreases when VIX futures fall.  I have not updated the content of the post below to reflect the strategy—I will when the details of the change become clearer.  REX ETF Press Release

———————————————————————————————————————————————————————————

In May of 2016, REX Exchange Traded Funds introduced two volatility oriented products, VMIN and VMAX.  One is a bet on market volatility staying the same or dropping (VMIN) and VMAX is essentially its mirror image—betting on short term volatility increases. VMIN has some important structural and performance related differences that distinguish it from the other short term inverse volatility funds—VelocityShares’ XIV and ProShares’ SVXY.

In this post I focus on VMIN’s differences from its competitors. If you are new to inverse volatility investing I suggest you review the fundamentals by reading How does SVXY Work?

For a good understanding of  VMIN (full name: REX VolMAXX™ Short VIX Weekly Futures Strategy ETF) you need to know how it differs from other inverse volatility funds, what it tracks, its risks to the investor, and how well it has performed.

How Is VMIN Different From a Performance / Tax Standpoint?

  • Far from being a “me-too” product, VMIN differs from its SVXY and ZIV competitors in a number of important ways. One key difference is that VMIN is designed to track the daily moves of the CBOE’s VIX® better than existing securities. VMIN is an inverse fund, so it generally moves in the opposite direction of the VIX.
  • In addition to this improved tracking, VMIN also outperforms its competitors in taking advantage of the structural drag of VIX futures when their term structure is in contango. Contango exists when longer-dated VIX futures are priced higher than VIX futures that have less time until expiration. The VIX futures that underlie the volatility Exchange Traded Products (ETPs) are in contango around 75% of the time. In the May 2016 to March 2017 time period, VMIN outperformed its completion by 28% due to this characteristic, more than tripling during that period. In fact, VMIN was the best performing fund in the ETP universe in the first quarter of 2017, outperforming all other 23,788 funds, with a 35% gain.
  • While VMIN is an Exchange Traded Fund (ETF) like SVXY, its tax reporting is the same as an ordinary equity investment with your short and long-term capital gains reported via 1099 forms. Because SVXY holds VIX futures directly tax laws require that it be treated as a partnership, reporting gains/losses via Schedule K-1 forms. While not a huge deal; K-1 forms are complicated and always seem to arrive very late in the spring.
  • VMIN will make distributions of any realized securities gains at least once a year. In a good year this special dividend will likely be substantial (for FY 2016 it was $9.92/share). Neither XIV nor SVXY distributes capital gains this way—they have different legal structures (Exchange Traded Note and an ETF structured under the Securities act of 1933 respectively). Special dividends from VMIN or VMAX will be taxed as ordinary income.

Read moreHow Does VMIN Work?

Is Shorting UVXY, TVIX, or VXXB the Perfect Trade?

The charts for long volatility Exchange Traded Products (ETP) like Barclays’s VXXB, VelocityShares’ 2X leverage TVIX, and PowerShares’ 1.5X levered UVXY are astonishing.

vxx-uvxy

I’m not aware of any other widely available securities that have declined like these.

Two questions come to mind:

  1. Why would anyone invest in these perennial losers?
  2. Why doesn’t everyone on the planet short these funds?

It turns out that there are reasonable reasons to buy these funds, and some people make money doing it. And a lot of people short these funds; it’s a crowded trade—to the point where it’s sometimes not possible to borrow the shares to short them.

It’s not easy money either way.

Read moreIs Shorting UVXY, TVIX, or VXXB the Perfect Trade?

The Cost of Contango—It’s Not the Daily Roll

It’s well known that long volatility Exchange Traded Products (ETPs) like VXX, UVXY, and TVIX often experience devastating losses during market quiet spells—even when the value of the VIX is staying relatively stable.  These heavy losses occur when the VIX futures that underlie these funds are in a price/time arrangement called contango. The chart below shows an example of VIX futures in a contango configuration.

ts-16sep16

The blue dots show the prices of various futures and the horizontal scale indicates the month of expiration.  The horizontal green line shows the current VIX price— also known as the “spot” price.  You can’t tell it from the chart, but in this example, the leftmost future has 4 days until expiration.  At expiration, a VIX future’s value will be very close to the VIX spot price.

When futures are in contango the longer the future has until expiration the higher its price.

If you were to take a time lapse video of this chart over time with a stable VIX you would see the blue dots moving down the blue line, eventually intersecting with the green VIX line at expiration.

Read moreThe Cost of Contango—It’s Not the Daily Roll