If you wanted an absolutely horrible investment in 2012, you
couldn't have done any better than buying and holding one of the
many exchange-traded products that provide exposure to futures
contracts linked to the CBOE Volatility Index, or VIX, the market's
leading measure of volatility.
The biggest and most popular VIX-related ETP on the market, the
iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca:VXX) was,
conveniently enough, also
worst-performing ETP on the market. Again, if you were truly
committed to losing your shirt, you could have wiped out more than
three-quarters of your money last year in VXX. In fact, six of the
10 worst-performing ETPs last year were VIX-related.
Of course, as any reasonable person will tell you, securities
like VXX aren't "investments" in the classic buy-and-hold sense;
rather, they're best used as short-term portfolio insurance of
sorts, spiking in value when the market tanks and, as last year
made clear, falling deeply into the red when markets are
And that's precisely my point.
While the structure of these futures-linked, VIX-related ETPs
leaves a lot to be desired in terms of how "negative roll-yield"
can voraciously eat up returns over time-even when they're
spiking-the fact that VXX and its ilk dominated our 2012
worst-performers list says something about the macroeconomy that
investors everywhere should heed.
As an aside, truly adverturesome traders with a bullish outlook
and a yearning for exquisitely calibrated ways to secrete dopamine
might already be laughing all the way to the bank if only they were
shrewd enough to take a position last year in the VelocityShares
Daily Inverse VIX Short Term ETN (NYSEArca:XIV). After all, that
short ETN, which jumps when VXX tanks, catapulted almost 155
percent in all of 2012.
Bottom 10 YTD Performers
||iPath S&P 500 VIX Short-Term Futures ETN
||VelocityShares VIX Short Term ETN
||ProShares VIX Short-Term
||iPath S&P 500 VIX Mid-Term Futures ETN
||VelocityShares VIX Mid Term ETN
||ProShares VIX Mid-term
||iPath Dow Jones-UBS Coffee Total Return ETN
||iPath Pure Beta Coffee ETN
||iPath Dow Jones-UBS Natural Gas Total Return ETN
||Market Vectors Solar Energy
Turning Of The Tide
In any case, things
getting better. Even if you concede the point to the folks at Pimco
that the so-called New Normal means that the economy is in for an
extended period of subpar growth, it's becoming increasingly clear
that it really isn't 2008 anymore.
And I don't say that lightly. It has certainly been an
exceedingly dodgy few years.
I'll never forget Sept. 29, 2008, when the Dow Jones industrial
average lost 777 points after Congress initially refused to approve
the Bush administration's $700 billion request for bank bailout
funds. And I hope I never relive that sinking when-will-it-end
feeling in the early days of the Obama administration when the
stock market plumbed new lows.
Unsettling events kept rolling in, driving home the point that
Federal Reserve Chairman Ben Bernanke sought to emphasize from the
first that downturns emanating from the credit markets are the most
serious by far, and that time is one of the most crucial variables
before the tide turns.
And so it went:the "flash crash" on May 6, 2010, that dealt
another blow to the markets, and then the embarrassing debt ceiling
negotiations in Washington, D.C., in the summer of 2011 that led to
the first-ever downgrade of U.S. sovereign debt by Standard &
That year ended, ironically, with Treasurys soaring and
focused on T-notes and T-bonds dominating the best-performers list.
The point was that investors were still pretty freaked out in 2011.
But not anymore.
Equities Shined In 2012
Fast-forward to the end of 2012-a year that financial markets
finally heard the European Central Bank declare it would act as a
lender of last resort in the eurozone-and an interesting variety of
equity funds have replaced Treasurys as the top-performing funds,
suggesting people are now taking on risk.
We've written quite a lot in the past few weeks about some of
the now-hot-performing sectors, such as housing and the emerging
The top two ETFs in 2012-the iShares Dow Jones U.S. Home
Construction Index Fund (NYSEArca:ITB) and the iShares MSCI Turkey
Index Fund (NYSEArca:TUR)-returned 78.7 percent and 63.2 percent,
Top 10 YTD Performers
||iShares Dow Jones U.S. Home Construction
||iShares MSCI Turkey Investable Market
||SPDR S&P Homebuilders
||Guggenheim China Real Estate
||EGShares India Consumer
||Market Vectors Biotech
||iShares MSCI Philippines Investable Market
||iShares FTSE EPRA/NAREIT Developed Asia
||Market Vectors Egypt
||PowerShares Dynamic Building & Construction
If the presence of VIX funds on our worst-performers list isn't
telling you that markets are tiring of volatility and starting to
normalize, you'll just have to keep taking measure of the generally
improving stream of economic data, such as the latest U.S.
employment report that showed the good-if-not-great creation of
155,000 jobs in the final month of 2012.
I'll go out on a limb here and predict that a year from now,
I'll be writing about the plethora of Treasury ETFs that have
replaced VIX ETNs on the worst-performers list. For now, I may be
After all, the Pimco25+ Year Zero Coupon U.S. Treasury ETF
(NYSEArca:ZROZ), the top-performing ETF in 2011, now finds itself
among the bottom dwellers, as our first weekly snapshot of ETF
returns showed today.
If my prediction about the fate of funds this year like ZROZ
does come true, it will be bad news for doubting Thomases, because
by that time, the best part of the bullish head of steam that
appears to be forming might be over.
Disclaimer:All data as of 6 a.m. Eastern time the date the
article is published. Data is believed to be accurate; however,
transient market data is often subject to subsequent revision and
correction by the exchanges.
At the time this article was written, the author held no
positions in the securities listed. Contact Olly Ludwig at
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