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

Updated: Apr 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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How Does TVIX Work?

Updated: Mar 10th, 2017 | Vance Harwood

Exchange Trade Note TVIX and its Exchange Traded Fund cousin UVXY are 2X leveraged funds that track short term volatility.  To have a good understanding of TVIX (full name: VelocityShares Daily 2x VIX Short-Term ETN you need to know how it trades, how its value is established, what it tracks, and how VelocityShares makes money on it.


How does TVIX trade? 

  • For the most part TVIX trades like a stock. It can be bought, sold, or sold short anytime the market is open, including pre-market and after-market time periods.  With an average daily volume of 21 million shares its liquidity is excellent and its bid/ask spread is penny.
  • Like a stock, TVIX’s shares can be split or reverse split. If fact, TVIX reverse split 3 times in its first four years of existence. The last reverse split was 10:1 and I’m predicting the next one will be around September 2016 with a 10:1 ratio also.  See this post for more details.
  • Unlike UVXY there are no options available on TVIX.
  • TVIX 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 TVIX’s value established?

  • Unlike stocks, owning TVIX 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 TVIX. While you’re at it forget about technical style analysis too, the price of TVIX is not driven by supply and demand—it’s a small tail on the medium sized VIX futures dog, which itself is dominated by SPX options (notional value > $100 billion).
  • According to its prospectus the value of TVIX is closely tied to twice the daily return of the S&P VIX Short-Term Futurestm .
  • The index is maintained by S&P Dow Jones Indices. The theoretical value of TVIX if it were perfectly tracking 2X the daily returns of the short term index is published every 15 seconds as the “intraday indicative” (IV) value.  Yahoo Finance publishes this quote using the ^TVIX-IV ticker.
  • Wholesalers called “Authorized Participants” (APs) will at times intervene in the market if the trading value of TVIX diverges too much from the IV value.  If TVIX is trading enough below the IV value they start buying large blocks of TVIX—which tends to drive the price up, and if it’s trading above they will short TVIX.  The APs have an agreement with Credit Suisse that allows them to do these restorative maneuvers at a profit, so they are highly motivated to keep TVIX’s tracking in good shape.


What does TVIX track?

  • Ideally TVIX would exactly track the CBOE’s VIX® index—the market’s de facto volatility indicator.  However since there are no investments available that directly track the VIX VelocityShares chose to track the next best choice: VIX futures.
  • VIX Futures are not as volatile as the VIX itself; solutions (e.g., like Barclays’ VXX) that hold unleveraged positions in VIX futures typically only move about 55% as much as the VIX. This shortfall leaves volatility junkies clamoring for more—hence the 2X leveraged TVIX and UVXY.
  • TVIX attempts to track twice the daily percentage moves of the S&P VIX Short-Term Futurestm  index (minus investor fees).  This index manages a hypothetical portfolio of the two nearest to expiration VIX futures contracts.  Every day the index specifies a new mix of VIX futures in that portfolio.  For more information on how the index itself works see this post or the VXX prospectus.
  • TVIX’s tracking to its target index is not as good as UVXY.  I’ll get into the details of why later in the post, but on average you pay a premium of almost 2% for TVIX shares relative to the index it tracks, compared to a premium of 0.25% for UVXY.   For a security as volatile as TVIX this is not an especially big deal, but worth knowing.
  • If you want to understand how 2X leveraged funds work in detail you should read this post, but in brief, you should know that the 2X leverage only applies to daily percentage returns, not longer term returns. With a leveraged fund longer term results depend on the volatility of the market and general trends.  In TVIX’s case these factors usually (but not always) conspire to dramatically drag down its price when held for more than a few days.
  • The leverage process isn’t the only drag on TVIX’s price. The VIX futures used as the underlying carry their own set of problems. The worst being horrific value decay over time.  Most days both sets of VIX futures that TVIX tracks drift lower relative to the VIX—dragging down TVIX’s underling non-leveraged index at the average rate of 7.5% per month (60% per year).  This drag is called roll or contango loss.
  • The combination of losses due to the 2X structure and contango add up to typical TVIX losses of 15% per month (85% per year). This is not a buy and hold investment.
  • On the other hand, TVIX does a decent job of matching the short term percentage moves of the VIX. The chart below shows historical correlations with the linear best-fit approximation showing TVIX’s moves to be about 93% of the VIX’s. The data from before TVIX’s inception on October 3, 2011 comes from my simulation of TVIX based on the underlying VIX futures.


  • Most people buy TVIX as a contrarian investment, expecting it to go up when the equities market goes down.  It does a respectable job of this with the median TVIX’s percentage move being -4.8 times the S&P 500’s percentage move. However 18% of the time TVIX has moved in the same direction as the S&P 500.  So please don’t say that TVIX is broken when it doesn’t happen to move the way you expect.
  • The distribution of TVIX % moves relative to the S&P 500 is shown below:

TVIX ratio histo

  • With erratic S&P 500 tracking and heavy price erosion over time, owning TVIX is usually a poor investment. In fact, even the provider’s marketers who you’d expect to figure out a positive spin, state that “The long term expected value of your ETNs is zero.”  Unless your timing is especially good you will lose money.


How do Credit Suisse and VelocityShares make money on TVIX?

  • Credit Suisse, TVIX’s issuer, collects a daily investor fee on TVIX’s assets—on an annualized basis it’s 1.65% per year.  With current assets of around $250 million this fee generates approximately $4 million per year.  That should be enough to cover TVIX costs and be profitable, however I suspect their business model includes revenue from more than just the investor fee.
  • VelocityShares (now owned by Janis Capital Group) – gets a portion of the investor fee for its marketing and branding efforts.
  • Unlike an ETF, TVIX’s Exchange Traded Note structure does not require Credit Suisse to specify what they are doing with the cash it receives for creating shares.  The note is carried as senior debt on their balance sheet but they don’t pay out any interest on this debt.  Instead they promise to redeem shares that the APs return to them based on the value of its index—an index that’s headed for zero.
  • To fully hedge their liabilities Credit could hold the appropriate number of VIX futures contracts, but they almost certainly don’t because there are cheaper ways (e.g., swaps) to minimize their risks.  Given TVIX’s inexorable journey towards zero it would be tempting to assume some risk and not fully hedge their TVIX position, but I doubt Credit Suisse has a corporate culture that would support that. Instead, I suspect they put fund assets not needed for hedging to work earning interest on relatively safe investments like collateralized repurchase agreements.  Earning even an extra percent or two annually on $250 million is real money.

February through March 2012 —When TVIX was not working

  • In February 2012 TVIX’s assets were growing rapidly, climbing several hundred million in a few days to reach $691 million. Normally this would be viewed as a very good thing by an ETN’s issuer, but Credit Suisse was not happy.  With a daily resetting fund like TVIX positions need to be rebalanced daily, and with a 2X leveraged fund the positions adjustments needed are equal to the day’s percentage move times the asset value of the fund.  So if TVIX was to move +30% in a day, not unprecedented, and the assets were at $690 million, then an additional $207 million in hedging securities would need to be purchased that day.  We don’t know the reason, but likely because of the costs of doing that hedging or the risks of a swap’s counterparty defaulting Credit Suisse decided to stop creating new TVIX shares on February 22, 2012.  This prevented the assets of the fund from growing any larger.
  • You might think that limiting the number of shares in an ETN would be a good thing for the shareholders—if shares are scarce they might become more valuable. But for exchange-traded products this is a very bad thing.   The share creation mechanism is essential to the process that keeps the fund closely tracking its underlying index.  Specifically, if TVIX’s value gets too high relative to its index the authorized participants will normally short TVIX and hedge that position with VIX futures related securities to lock in a risk-free profit.  They will continue to short sell, driving down TVIX’s price until the gap between TVIX and the index is too small for this arbitrage transaction to be profitable.
  • Short selling requires that there be shares available to be borrowed, and with Credit Suisse no longer willing to create new shares the supply of borrowable shares dried up completely. As a result TVIX’s share value became untethered from its index and by the end of March was trading at a 90% premium to the index.  In market cap terms there was around $277 million of bogus value in TVIX.
  • In late March 2012 Credit Suisse resumed share creation and the TVIX premium evaporated instantaneously—leaving a lot of stunned and poorer shareholders. Credit Suisse’s solution to their problem was to lay more of the risk on the authorized participants, requiring them to provide the necessary securities before they would create shares.  The extra cost of doing this is reflected in the premium (often around 1% or 2%) in TVIX’s price over its index.


TVIX—destroyer of wealth

  • According to’s ETF Fund Flows tool, TVIX’s net inflows have been around $1.8 billion since its inception in 2010.  It’s currently worth $220 million, so VelocityShares has facilitated the destruction of over one and a half billion dollars of customer money—so far.  I’m confident this overall destruction will continue.

TVIX’s race to zero attracts a lot of short sellers.  That strategy works most of the time, but if your plan is to ride out any volatility along the way be prepare to handle a 4X or more spike in TVIX”s value.  Most people are unequipped both financially and emotionally to handle this sort of reversal.

TVIX has a proven record as a cash incinerator, but its occasional upward spikes continue to attract speculators hoping to profit from the anguish of the general market.  A few traders with impeccable timing or good luck will make good money going long on TVIX.  Most will lose money.

TVIX split adj price 2004

Backtests for Popular Long & Short Volatility Exchange Traded Products

Updated: Nov 15th, 2017 | Vance Harwood

I have generated the end of day trading day values for the most  popular long and short volatility Exchange Traded Products (ETPs) for March 26th, 2004 through February 28th, 2017

These ETP histories are required if you want to backtest various volatility strategies through the quiet times from 2004 to 2007, or the 2008/2009 crash.  The chart below shows the simulated values with a logarithmic vertical axis so that you can see a reasonable amount of information for each fund.


The table below shows how much $1000 invested in each of these funds on March 26th, 2004 would have been worth on March 7th, 2017:
Symbol $ Value
TVIX $0.00000019
UVXY $0.00000020
VXX $0.17
VXZ $87.09
ZIV $2523
XIV $35853


The algorithms for generating these ETPs values are documented in the prospectuses for the various volatility ETNs and ETFs.    Barclays’ VXX/VXZ fund prospectus is a good example.   See Volatility tickers for the current universe of  USA based volatility ETPs and their associated reference indexes.    The futures settlement data required for these calculations is available on this CBOE website—in the form of 100+ separate spreadsheets.  To make the calculation of the indexes underlying the ETPs tractable  I created a master spreadsheet that integrates the futures settlement data into a single sheet.  See this post for more information about that spreadsheet.

With the exception of TVIX—which has had severe tracking problems since early 2012 my simulated values very closely track the published indicative values (IV) of the funds.  Barclays provides a full set of IV values for VXX and VXZ—my simulation tracks them within +-0.04% and +-0.025% respectively.   Sampled IV values for the other funds give error terms of  +-0.2% for Proshares UVXY,  and for VelocityShares XIV and ZIV +-0.2% and +- 0.01% respectively.   My TVIX simulation tracks sampled IV values within +2%/-4%.

If you need simulated intraday open, high, low values also check out this post.

These ETP prices reflect the contribution of 91 day treasury bills on their overall performance.   Thirteen-week Treasuries yields averaged 0.05% in 2013,  but in February 2007 they yielded over 5%— things have changed a bit…   The simulated ETP values do include applicable fees which vary from fund to fund.   The fee calculation is surprisingly difficult.  For more on that see Backtest on VXX Including Annual Fees

I am making these 6 simulation spreadsheets (values only, no formulas) available for purchase, individually, or as a complete package. The VXX package is also available here.   If you cannot see purchase information immediately below then please click this link to the stand-alone post and look at the bottom of the page.

For more information on the spreadsheets see readme.

If you purchase the spreadsheet you will be directed to paypal within a few minutes where you can pay via your paypal account or a credit card. When you successfully complete the paypal portion you will be shown a “Return to Six Figure Investing” link. Click on this link to reach the page where can download the spreadsheet.  Please email me at [email protected] if you have problems, questions, or requests.  It’s easy to miss the “Return to Six Figure Investing” link.  If you don’t get it / can’t find it please email me.

Estimated TVIX Reverse Split Number 6—February 20th, 2018

Updated: Dec 27th, 2017 | Vance Harwood


Credit Suisse’s  fifth reverse split of TVIX was March 16th, 2017 with a 10:1 reverse split.   Based on the decay rate since that split (-91%/year!) I’m estimating the next TVIX reverse split, number six, will be on February 20th, 2018.

This split will reduce transaction costs by making the bid /ask spread as a percentage of the price smaller (when TVIX is trading around $4 the one cent minimum spread TVIX’s bid / ask spread is effectively a 0.25% transaction charge).  It will also likely make TVIX easier to short—a popular activity with any long volatility fund.  For information about shorting long volatility funds see “Is Shorting TVIX the Perfect Trade.”

Lacking major volatility spikes the 2X leveraged short term volatility ETPs like VelocityShares’ TVIX and ProShares’ UVXY need to reverse split at least every year to keep their products in a reasonable trading range.   Without market panics, these 2X long funds tend to be ravaged by contango at the rate of around 90% per year.   In the past Credit Suisse has allowed TVIX to drop below $1 before implementing reverse splits, but recently that threshold has been raised to around $4 / share.

After a period of reduced erosion in 2014 and 2015 TVIX’s decay rate has returned to the 90%+ per year range.   The post “Monthy & Yearly Decay Rates for Long Volatility Funds” shows how decay rates have shifted over time. 

Event Dates Split Ratio Inception / close price right before reverse split (split adjusted)  Months since inception /last split
Inception 29-Nov-2010 100 (25,000,000)
1st Rev. Split 21-Dec-2012 10:1 0.9 24
2nd Rev. Split 30-Aug-2013 10:1 1.68 9
3rd Rev. Split 23-June-2015 10:1  0.75 22
 4th Rev. Split 9-August-2016 25:1  0.92  14
 5th Rev. Split 16-March-2017 10:1  3.84  8
 6th Rev. Split 13-Feb 2018 10:1 ~4 11

If you hold shares of TVIX before a reverse split there isn’t anything to worry about.  The value of your investment stays the same through the reverse split process.  You just have 10X fewer shares that are worth 10X more each.   If your share holdings are not a multiple of 10, say 43 shares, you will get 4 reverse adjusted shares and a cash payout for the 3 remaining pre-split shares.

If you are short TVIX, same story, no material impact.

For more on TVIX see:

When You Think Your Exchange Traded Fund is Broken…

Updated: Mar 9th, 2017 | Vance Harwood

When you thing your ETF/ETN is broken...
Frequently I see people complaining that their Exchange Traded Fund (ETF) or Exchange Traded Note (ETN) is broken. Occasionally they’re right, but most of the time they’re not.  Before complaining, here are some things to look at:

  1. Are you looking at the right index?
    • All Exchange Traded Products (ETPs) track an index, which is identified in their prospectus, and in the fund’s fact sheet.   Don’t assume what the index is.  For example, the index that VXX tracks is not the CBOE’s VIX® , and UVXY the 2X volatility fund is not designed to track 2X the VIX.
    • None of the volatility funds track the VIX, they all use other indexes, because the VIX itself is not investable.  Some funds (e.g., UVXY, TVIX) do a semi-decent job of tracking the VIX in the short term, but nobody does a good job in the medium to long run.  In fact it’s a killing field.
    • Investigate the index once you’ve determined what it is.  It’s often not easy; sometimes even getting quotes on indexes is hard.  But similar to the hunter’s credo of eating what they kill, investors should understand what they trade.
  2. Is the fund leveraged/geared (e.g., 2X, 3X), or an inverse fund?
    • Leveraged or inverse funds typically do a good job of delivering their target performance on a daily basis, but usually fall far short with longer time frames.  The reason is compounding error, or path dependency.  It erodes the value of these funds in choppy markets.
    • For example if a non-leveraged fund (e.g., SPY) goes up 10% one day and down 9.09% the next it ends up even.   However the 2X fund (SSO) and the inverse fund (SH) both end up down 1.8%
      • 2X Fund: (10*(2*10%)=12, 12*(2*-9.09%) = 9.82
      • -1X Fund: (10* (-10%) =9,  9 *(+9.09%) = 9.82
  3. What are the timestamps of the quotes you are looking at?
    • Unless your fund is very active the quote you’re using might be older than you think.  For example the fund’s closing value might reflect a trade that happened hours before market close.  If you look at an intra-day chart of your fund including volume you should be able to see when the trades occurred and the quotes updated.  Typically the intraday indicative value (“IV”) quote is a more accurate way of getting the actual fund value. It’s updated every 15 seconds during market hours.
    • The IV quote tickers are not standardized.  Yahoo finance uses a “^” prefix and a “-IV” suffix to get the IV value (e.g., ^VXX-IV).  For more on IV quote symbols see Trading ETFs Without Getting Fleeced.
  4. Are the markets you’re comparing closing at the same time?
    • VIX futures markets at the CBOE Futures exchange trade for 15 minutes after the equities markets close.   The volatility ETPs are based on volatility indexes that are based on futures settlement values.  Eli from VIX Central points out that these settlement values can come out well after 4:15.  The final IV update for the day appears to reflect these late settlements—giving us the real closing value for the volatility funds.
  5. Is the trading value of the funds diverging significantly from its index or IV value?
    • If this is the case, your fund might be broken, but before we pursue that there are a couple thing to check:
      • Are the markets for the underlying assets closed (e.g., Asian or European stocks)?  If so those indexes can’t update so some divergence during USA trading hours should be expected.
      • Are the securities for the underlying assets illiquid or rarely traded (e.g., high yield corporate bonds)?  If so the trading value might reflect the market’s estimation of what those assets are worth, rather than the last trade, or published bid/ask quotations.

If you’ve checked through all the items above and things still look wrong your fund may indeed be broken.  Historically the only pathology for ETF/ETNs is to have their share creation process halted or somehow limited.  Some of the stated reasons for doing this are:

  1. Market closures (e.g., the Egyptian stock market EGPT closed for 2 months in 2011)
  2. Regulatory hurdles, where permission to issue new shares is delayed UNG,      UNL,DNO
  3. Issuer “internal limits on the size of ETNs”, TVIX
  4. Commodity  position limits, where the exchanges won’t allow the funds to accumulate more contracts UNG
  5. Self-imposed market cap limits AMJ

In all these cases the share redemption process has been left intact.  In practice if share creation is stopped and redemption is working the ETP’s price can rise higher than the index, but not drop significantly lower than the index.   Both UNG and TVIX were expensive object lessons for the people that didn’t understand this.

The NYSE  has a good webpage that lists all the funds that currently have suspended or put limits on share creation.  Unless these suspensions are temporary these funds should be avoided.