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How do VelocityShares’ EVIX and EXIV Work?

Saturday, August 19th, 2017 | Vance Harwood

In May 2017 VelocityShares introduced two new 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 VelocityShares’ XIV and Barclays’ VXX, however, these funds depend on a set of securities and processes with subtle and not so subtle differences with the mainstay USA volatility funds.

If you are not familiar with VIX futures based volatility Exchange Traded Products (ETPs) then I recommend you first take the time to read these posts on VelocityShares’ XIV and Barclays’ VXX before you tackle these new arrivals.

Some Basics

  • EVIX is a short-term long volatility fund that will tend to go up if European stocks go down significantly.
  • EXIV is a short-term inverse volatility fund that tracks the opposite of EVIX’s percentage moves on a day only basis. Because EVIX adjusts its assets at market close to achieve its daily tracking goal it does not behave like a true short of VIX—which can be a good thing or a bad thing depending on the market moves.
  • The Swiss bank, UBS AG, is the issuer of both of these Exchange Traded Notes (ETNs). They are structured as unsecured long term debt securities.  As of August 2017, Moody’s rating of UBS’ long term debt was: “A1 Not on Watch.”  The investor fee charged by UBS AG is 1.35% annualized for EVIX and EXIV, this compares to 1.35% for XIV and 0.89% for VXX.
  • The European Volatility futures that these funds track settle at expiration to the European volatility index VSTOXX. VSTOXX uses a methodology very similar to the CBOE’s VIX but instead of being based on the prices of S&P 500 (SPX) options the VSTOXX is based on STOXX option prices.
  • The STOXX index is comprised of 50 of the largest companies in the Eurozone and is capitalization weighed like the S&P 500. It does not include companies from the UK. These 50 stocks represent around 60% of the Eurozone stock market value. In comparison, S&P 500 represents around 80% of the total USA stock market capitalization. Similar to the S&P 500 index, the STOXX index does not include dividends, so the returns of actually holding the constituent stocks would be higher than the index indicates.  For the last 5 years, the STOXX dividends have averaged 2.5% vs 1.9% for the S&P 500.
  • EVIX and EXIV track indexes (VST1MSL & VST1MISL respectively) that theoretically hold a mixture of the two VSTOXX futures nearest to expiration. The mixture gives an expiration horizon of 30 days, similar to the VIX future based short term volatility funds like VXX and XIV.  These funds are fully divested out of expiring futures the day before their expiration/final settlement.
  • Both funds effectively do a daily end-of-day rebalance that adjusts the number of volatility contracts that they hold in order to maintain a 30-day average horizon. At the same time EXIV also does an asset rebalance such that its daily percentage move will closely match the opposite of EVIX’s next day daily percentage move (see How Does XIV Work? for more on this).


  • Standard processes and rough equivalences in key securities


Generic Securities


European Version USA Version Standard Processes
Volatility Futures VSTOXX futures VIX futures Settlement
30-day Volatility Index VSTOXX VIX Index calculation
Large Cap Stock Index STOXX 50 S&P 500 Stock index selection
Large Cap Stock Options OESX SPX Settlement, Cash Settled, European exercise


    • The key securities and processes are similar between the European and USA markets but in no case have I found a pair of processes that are identical. For example, VIX futures settle to a special opening quotation of the CBOE’s VIX® soon after market open on expiration days whereas VSTOXX futures final settlement price is determined by the average VSTOXX index level between 11:30 and 12:00 CET on the day of expiration.
    • A significant difference between the VIX and the VSTOXX index is that the VSTOXX calculation does not incorporate options with bid prices below 50 Euro. This contrasts with the VIX’s calculation which uses options with bids as low as $5—which increases the chances that an institutional player might attempt to influence the VIX’s settlement value in their favor by buying or selling cheap out-of-the-money puts.
  • Quotes / Historical Data
    • While free quotes for EXIV and EVIX are easy to get with the usual sources (Online brokers, Yahoo, Google), obtaining quotes for the underlying securities/indexes is tougher. The ones I’ve found so far are:
    • STOXX
    • VSTOXX (ticker V2TX or DVY00)
    • VSTOXX Futures
    • VST1MSL (EVIX’s dollar denominated index)
    • VST1MISL (EXIV’s dollar denominated index)
    • Intraday Indicative value (IV) quotes for EXIV and EVIX are available from some brokers and Yahoo Finance. The symbols within Yahoo are ^EXIV-IV and ^EVIX-IV


  • Hours
    • Typically the European continent is 6 hours ahead of USA Eastern time. Standard closing time on the European continent exchanges is 5:30 PM, so they are closing at 11:30 Eastern time. The IV values for EXIV and EVIX don’t update after 11:30 ET because the OESX options used to compute VSTOXX are not trading past then. The Yahoo finance chart below illustrates EXIV’s IV value flat-lining during the afternoon.
    • The VSTOXX futures referenced by these funds trade from 7:30 to 22:30 CET.


  • Termination risk
    • Along with XIV and ProShares’ SVXY, EXIV will terminate if there is a large enough volatility spike. The funds are guaranteed to not go below zero and the issuers will not commit extra capital to meet margin calls in that sort of extreme situation.  In EXIV’s case, the fund will be automatically terminated if the drop in the intraday IV value is 75% or more from the previous day’s close.  For the USA markets, historical data suggests it would take a VIX intraday spike of at least 166% to result in a 75% drawdown in the inverse volatility funds and I suspect that the VSTOXX/ VSTOXX futures sensitivities are similar. In the case of termination shareholders would receive the net value of the fund after the transactions settle from that event.  The value is not guaranteed to be 25% of the previous day’s value, it is only guaranteed to be zero or higher.

Comparing Markets—and Indexes

The chart below compares the historical values of the S&P 500 and the STOXX as well as the VIX and VSTOXX since January 1998.

  • A few things stand out when looking at the STOXX (red line)
    • The STOXX fully participated in the 2000 dot com crash and the 2008/2009 bear markets
    • The STOXX is still well below its 2000 highs—the lack of recovery in the STOXX after the 2008/2009 financial crash is striking
  • Looking at VSTOXX (purple) vs the VIX (black) above:
    • The VSTOXX shows mean reverting behavior similar to the VIX. Sharp spikes up are followed by fairly rapid decays towards the mean values.
    • Periods of low volatility can persist for a long time but eventually, the VSTOXX reverts back to values closer to the mean
    • Generally, the VIX and the VSTOXX are closely correlated
    • The VSTOXX value is almost always higher than the VIX’s value
  • Some statistics for the S&P 500 and the STOXX, January 1999 through July 2017:
Compound Annual Growth (dividends not included) 3.75% -0.25%
Annualized Volatility (365 day year) 23.4% 28.1% (20% higher than S&P 500)
Worst Case Drawdown -56% (2009)


-65% (2003)
Correlation of % moves 0.54 (moderately high) between S&P 500 and STOXX


  • Statistics for the VIX and the VSTOXX, January 1999 through July 2017
Average 20.36 24.85 22% higher
Median 18.52 22.89 23% higher
Low 9.75 11.16 14.5% higher
High 80.86 87.51 8% higher
Annualized Volatility

(365 Day Year)

111.4 126.2 13% higher
Value Correlation .905 (high) between VIX and VSTOXX values
Correlation of % moves 0.544 (moderately high) between VIX and VSTOXX % moves
Biggest one day drop -29.5%  (10-May-10) Flash Crash aftermath -35.2%  (24-Apr-17) Le Pen defeat
Biggest one day spike +65.2% (27-Feb-07) China scare +38.8% (24-Aug-15)  China scare II
Mode (most common value)  [0.1 pt bins] 13.3 23.1


  • Since the STOXX’s historic volatility is about 20% higher than the S&P 500’s it’s not surprising that the VSTOXX’s average and median are around 20% higher than the VIX’s.

The chart below shows a histogram of values for the VSTOXX and the VIX

  • A few observations:
    • The VSTOX distribution is shifted notably higher in value than the VIX
    • While the two index distributions have truncated left “shoulders” and big fat tails on the right the VSTOXX has a significantly more balanced distribution around its mean compared to the bottom heavy VIX.
    • The difference between the mode (the most common value rounded to 0.1 pts) and the record low is only 36% with the VIX compared to 107% for the VSTOXX


Historic Performance

  • By using a simulation starting in June 2009 of the indexes that EXIV and EVIX are based on we can get a feel for their performance relative to XIV and VXX. The only difference between the indexes and the EVIX/EXIV ETNs is that the investor fees and treasury bill interest are not included in the index values. The chart below shows relative performance when starting with portfolios of $10K fully invested in each of the funds.


  • The two lines starting high on the left (green and purple lines) are long volatility funds that reference the left axis scale. The long volatility funds exhibit the typical long volatility fund race to zero, with VXX slightly better at losing value.
  • The two inverse volatility funds (red and blue lines) referencing the right scale perform much better than the long funds. Overall XIV’s performance dominates with an approximate 40X growth since 2009.

Using a log scale on the vertical axis provides a much more accurate visual way to judge relative performance. The first chart shows VXX index vs the EVIX index

  • The two portfolios begin diverging in early 2010 and don’t return to a similar loss rate until 2016.
  • Over the 2010 to 2015 period EVIX’s decay rate was significantly lower than VXX’s. It’s likely that the VSTOXX futures had considerably lower contango levels during that period compared to the VIX’s futures
  • Looking at the inverse volatility story with a log scale tells a similar tale except that the portfolios diverge almost immediately after the simulation is started.

Similar to the long side of the things, since around January 2016, the performance of the two inverse funds has been pretty close. Starting the portfolio simulation for both the long and inverse funds in January 2016 suggests that the USA and European based funds would have tracked relatively closely since then.  The chart below shows the result of the simulation.

When to Use These New Funds

  • An obvious application for these new funds is placing a bet on an upcoming European event with potentially major impact (e.g., a Brexit vote, or the Le Pen / Macron election). In “known/unknown” cases like this the date of the event is well known, but the result is uncertain and potentially economically impactful.  It’s certain that the VSTOXX will go up before an event like this, the interesting, and potentially lucrative question is what will happen to volatility after the event—panic/distress or a collapse back to the status quo.
  • Diversification is another application. Obviously, the European markets are not in lockstep with the USA markets and this distance will tend to smooth out some of the volatility shocks.  For example, XIV dropped 17.8% on May 17th, 2017 from its previous close, but EXIV only dropped 9.2%.  A portfolio holding both XIV and EXIV would have some cushioning against these sorts of glitches.
  • Having EVIX and EXIV gives traders a way to profit if they see an upcoming convergence or divergence between the volatility indexes in the two markets. For example, if you believe a recent volatility jump in USA markets will propagate to the Europe you could do a straight EVIX purchase or a pairs trade between EVIX and a long volatility fund like VXX.
  • It might be possible to do some form of contango arbitrage with these funds. It’s certain that the contango losses/gain won’t be identical between the two sets of futures markets, a pairs trade might allow a trader to profit from the difference in contango rates with an overall reduced risk exposure.


  • There are differences in the trading hours of these two markets. On the USA side of things, the Intraday Indicative (IV) quotes will be frozen on EVIX and EXIV past the normal close of the European markets, depriving us of an important piece of trading information that’s useful for trading low volume ETPs like these. On the European side, we have times when the volatility securities are trading while the USA markets are closed. For example, you might want to close out EXIV positions if the STOXX was crashing, but if the USA markets are closed there would be no direct way to do that.
  • Since VSTOXX futures are denominated in Euros and EVIX/EXIV are dollar-denominated, exchange rate changes will have effects, although compared to the normal hysteria of volatility markets I doubt it will be significant. Since EXIV is effectively short VSTOXX futures the impact of currency rate changes will be in the opposite direction of EVIX which holds long positions.
  • The EVIX/EXIV calculations assume that cash not needed for margin on the futures will be “invested” in short term German treasury bills—which have been running at negative interest rates (currently -0.734%). Negative rates will result in a minor drag on these fund’s values.
  • Options are available on EVIX, but not on EXIV. You might guess that the CBOE shies away from options on inverse volatility funds because of their termination risk, but options are offered on ProShares’ SVXY so this argument doesn’t hold up.  On the same subject, it’s ridiculous that the CBOE does not offer options on XIV, a well-established fund with hundreds of millions in assets.


It’s head spinning to introduce a whole new set of securities and indexes into the already confusing area of volatility investing but as I reviewed the different ways to use EVIX and EXIV it appears well worth the trouble to learn a few new things. These funds open up new volatility based opportunities in geographic based investing, diversification, and arbitrage style trades.

How Does VMIN Work?

Wednesday, July 5th, 2017 | Vance Harwood

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 XIV Work? and 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 XIV 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.

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

Wednesday, April 12th, 2017 | Vance Harwood

The charts for long volatility Exchange Traded Products (ETP) like Barclays’s VXX, VelocityShares’ TVIX, and PowerShares’ UVXY are astonishing.



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.

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

Wednesday, April 12th, 2017 | Vance Harwood

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.


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.

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How Does SVXY Work?

Friday, August 18th, 2017 | Vance Harwood


Just about anyone who’s looked at a multi-year chart for a long volatility fund like Barclays’ VXX has thought about taking the other side of the trade. ProShares’ SVXY is an Exchange Traded Fund (ETF) that allows you bet against funds like VXX while avoiding some of the issues associated with a direct short.

To have a good understanding of how SVXY works (full name: ProShares Short VIX Short-Term Futures ETF) you need to know how it trades, how its value is established, what it tracks, and how ProShares makes money with it.

How does SVXY trade?

  • SVXY trades like a stock.  It can be bought, sold, or sold short anytime the market is open, including premarket and after-market time periods.  With an average daily volume of 8 million shares, its liquidity is excellent and the bid/ask spreads are a few cents.
  • SVXY has options available on it, with five weeks’ worth of Weeklys and strikes in 50 cent increments.
  • Like a stock, SVXY’s shares can be split or reverse split—but unlike VXX (with 4 reverse splits since inception) SVXY has done three 1:2 splits to bring its price down into optimum trading levels. Unlike Barclays VXX, SVXY is not on a hell-ride to zero.
  • SVXY can be traded in most IRAs / Roth IRAs, although your broker will likely require you to electronically sign a waiver that documents the various risks with this security.  Shorting of any security is not allowed in an IRA.

How is SVXY’s value established?

  • Unlike stocks, owning SVXY does not give you a share of a corporation. There are no sales, no quarterly reports, no profit/loss, no PE ratio, and no prospect of ever getting dividends.  Forget about doing fundamental style analysis on SVXY. While you’re at it forget about technical style analysis too, the price of SVXY is not driven by its supply and demand—it is a small tail on the medium sized VIX futures dog, which itself is dominated by SPX options (notional value > $100 billion).
  • The value of SVXY is set by the market, but it’s closely tied to the daily percentage moves of the inverse of an index (S&P VIX Short-Term Futurestm) that manages a hypothetical portfolio containing VIX futures contracts with two different expirations. Every day the index methodology specifies a new mix of VIX futures in the portfolio. On a daily basis SVXY moves in the opposite direction of the index, so for example, if the index (ticker SPVXSPID) moves up 0.3%, then SVXY will move down precisely 0.3%. This post has more information on how the index itself works. The index is maintained by S&P Dow Jones Indices.
  • As is the case with all Exchange Traded Funds, SVXY’s theoretical share value is just the dollar value of the securities and cash that it currently holds divided by the number of shares outstanding. This theoretical value is published every 15 seconds as the “intraday indicative” (IV) value. Yahoo Finance publishes this quote using the ^SVXY-IV ticker. The end of day value is published as the Net Asset Value (NAV).  The NAV is computed at 4:15 ET, not the usual market close time of 4:00 ET, because VIX Futures don’t settle until 4:15.
  • If the trading value of SVXY diverges too much from its IV value wholesalers called Authorized Participants (APs) will normally intervene to reduce that difference. If SVXY is trading enough below the index they start buying large blocks of SVXY—which tends to drive the price up, and if it’s trading above they will short SVXY.  The APs have an agreement with ProShares that allows them to do these restorative maneuvers at a profit, so they are highly motivated to keep SVXY’s tracking in good shape.

What does SVXY track?

  • SVXY makes lemonade out of lemons.  The lemon, in this case, is the index S&P VIX Short-Term Futurestm that attempts to track the CBOE’s VIX® index—the market’s de facto volatility indicator. Unfortunately, it’s not possible to directly invest in the VIX, so the next best solution is to invest in VIX futures. This “next best” solution turns out to be truly horrible—with average losses of 5% per month. See this post for charts on how this decay factor has varied over time. For more on the cause of these losses see “The Cost of Contango”.
  • This situation sounds like a short sellers dream, but VIX futures occasionally go on a tear, turning the short sellers’ world into something Dante would appreciate.
  • Most of the time (75% to 80%) SVXY is a real moneymaker and the rest of the time it is giving up much of its value in a few weeks—drawdowns of 80% are not unheard of. The chart below shows SVXY from 2004 using actual values from October 2011 forward and simulated values before that.

SVXY hist Aug16


  • Understand that SVXY does not implement a true short of its tracking index. Instead, it attempts to track the -1X percentage inverse of the index on a daily basis.  To maintain this -1X behavior the fund must rebalance/reset its investments at the end of each day.  For a detailed example of how this rebalancing works see “How do Leveraged and Inverse ETFs Work?
  • There are some very good reasons for this rebalancing, for example, a true short can only deliver at most a 100% gain and the leverage of a true short is rarely -1X (for more on this see “Ten Questions About Short Selling”. SVXY, on the other hand, is up 600% since its inception and it faithfully delivers a daily percentage move very close to -1X of its index.
  • Detractors of the daily reset approach correctly note that SVXY and funds like it (XIV) can suffer from volatility drag. If the index moves around a lot and then ends up in the same place SVXY will lose value, whereas a true short would not, but as I mentioned earlier, true shorts have other problems.  Even with volatility drag daily reset funds don’t always underperform. If the underlying index is trending down, they can deliver better than -1X cumulative performance. The chart below shows the relative one-year performance of SVXY and a true short starting with $1K invested in January for 2011 through 2016.


How does ProShares make money on SVXY?

  • An Exchange Trade Fund like SVXY must explicitly hold the appropriate securities or equivalent swaps matching the index it tracks. ProShares does a very nice job of providing visibility into those positions. The “Daily Holdings” tab of their website shows how many VIX futures contracts are being held. Because of the -1X nature of the fund, the face value of the VIX futures contracts will be very close to the negative of the net “Other asset/cash” value of the fund.
  • ProShares collects a daily investor fee on SVXY’s assets. The fee is stated as a 0.95 annual fee, but it’s implemented by subtracting 0.95/365 of a percent from each share’s value every calendar day. With current assets at $280 million, this fee brings in around $2.5 million per year. That should be enough to be profitable, however I suspect the ProShares’ business model includes revenue from more than just the investor fee.
  • Exchange Traded Funds like SVXY recoup transaction costs in a non-transparent way. Transaction costs are deducted from the fund’s cash balance—resulting in a slow divergence of the fund’s IV value from the theoretical value of the index that it’s tied to. This differs from the approach that Exchange Traded Notes (ETN) use, their theoretical value is directly tied to the moves of the index itself, so the ETN issuers must pay for transaction costs other ways (e.g., out of the annual investor fee, or other explicit fees). In the case of SVXY, this hidden transaction fee has averaged around 0.28% per year.
  • One clue on ProShares’ business model might be contained in this sentence from SVXY’s prospectus:
    “A portion of each VIX Fund’s assets may be held in cash and/or U.S. Treasury securities, agency securities, or other high credit quality short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements).”  Agency securities are things like Fannie Mae bonds. The collateralized repurchase agreements category strikes me as a place where ProShares might be getting significantly better than money market rates. With SVXY currently able to invest around $250 million this could be a significant income stream.
  • I’m sure one aspect of SVXY is a headache for ProShares. Its daily reset construction requires its investments to be rebalanced at the end of each day, and the required investments are proportional to the percentage move of the day and the amount of assets held in the fund. SVXY currently holds $280 million in assets, and if SVXY moves down 10% in a day (the record negative daily move is -24%, positive move +18 %) then ProShares must commit an additional $28 million (10% of $280 million) of capital that evening. If SVXY goes down 10% the next day, then another $25 million capital infusion is required.

SVXY won’t be on any worst ETF lists like Barclays’ VXX, but its propensity for dramatic drawdowns (e.g. 69% in the 2015/2016 timeframe) will keep it out of most people’s portfolios. Not many of us can handle the emotional stress of holding on to a position with huge losses—even though the odds support an eventual rebound.

It’s interesting that an investment structurally a winner albeit with occasional setbacks is not as popular as a fund like VXX that’s structurally a loser, but holds out the promise of an occasional big win.

It seems that people would rather bet on a correction, rather than the slow grind of contango.