The temptation to get positive exposure to volatility using a
fund indirectly based on the CBOE Volatility Index is
understandable:Recent jumps in the equity indexes have been large
and generally negative.
And interest in volatility funds is running high. Investors sank
just under $2
into the largest VIX product, the iPath S&P 500 VIX Short-Term
Futures ETN (NYSEArca:VXX) in the first quarter of 2012, according
to data compiled by IndexUniverse.
But this fund flows number leads to yet another cautionary tale
on VIX products:Roughly half of this $2 billion in new money was
destroyed by the fund, by my estimate.
We can compare net fund flows to asset levels over this same
period to confirm this.
In a fund with zero return and perfect capital preservation
(like cash), the change in assets under management would equal the
net flows. For risky investments, the difference roughly equals the
gain or loss from the fund itself. (The frequency and size of
creations and deletions during the quarter plays a role, but the
larger point holds true).
The bottom line is this:Almost $1 billion-$990.8 million by my
math-was erased from VXX in the first quarter of 2012.
The VIX index itself, shown in black, is up 31.5 percent. VXX in
dark blue is up 22.2 percent-considerably less than the VIX index,
but at least within shouting distance. And a 22.2 percent return
for this brief period is a huge number to be sure.
But the iPath S&P 500 VIX Mid-Term Futures ETN
(NYSEArca:VXZ) and XVZ, the iPath S&P 500 Dynamic VIX ETN
(NYSEArca:XVZ), with returns of 8.3 percent and -0.3 percent,
respectively, haven't delivered the goods, even for this short
Bear in mind that none of these products is levered. They're
missing the performance of the VIX because they track VIX futures,
not the VIX index itself. And their varying returns are explained
by the particular futures exposure they use.
Getting into VIX products reminds me of the temptation to jump
into a raging mountain river on a hot spring day, with results
ranging from exhilaration to disaster:Better look before you
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