The UBS E-TRACS Daily Long-Short VIX ETN (NYSEArca:XVIX) aims to
harvest persistent inefficiencies in the VIX futures curve.
Specifically, XVIX provides 100 percent long exposure to midterm
VIX futures and 50 percent short exposure to short-term VIX
futures. Midterm and short-term means five-month and one-month
weighted average exposure, respectively.
The ETN's index resets daily. In general, the ETN will make
money when the midterm futures outperform the front-month futures,
consistent with the 100 percent long and 50 percent short exposure
scheme. Stated plainly, XVIX is designed to profit on the term
structure of VIX volatility futures, and not from volatility in
XVIX just passed the six-month mark, so this seems like a good
time to take a peek at how it's fared. But what's a good benchmark?
The ETN's website provides helpful information on short-term and
midterm VIX futures, the VIX Volatility Index itself and on the
S&P 500. While these ingredients definitely fall into the stew
of underlying exposures, they provide little insight into
Let's back up to think about the goals of the fund. Key feature
No. 1 from the fund's fact sheet is:"Capitalize on steepness of
short end of VIX futures curve." That's absolutely true, but I'm
looking for clues as to how this ETN is used in a portfolio.
Key Feature No. 2:"Historically uncorrelated to stock market
returns." Bingo. Like many other ETF and ETN products, XVIX aims
for absolute returns. So let's compare it
with other funds that might play a similar role in a portfolio:the
Cambria Global Tactical ETF (NYSEArca:GTAA), the PowerShares DB G10
Currency Harvest (NYSEArca:DBV) and the ProShares RAFI Long/Short
The ETN's six-month returns place third out of these four funds.
Its daily volatility for the period, as measured by standard
deviation, is a bit better:second place out of the four.
But XVIX is much more compelling in the correlations department.
I used the SPDR S&P 500 ETF (NYSEArca:SPY) and the iShares
Barclays Aggregate Bond Fund (NYSEArca:AGG) as proxies for equity
and bond markets. XVIX beats the others here, especially versus
XVIX also delivered near-zero correlation with the iPath S&P
500 VIX Short-Term Futures ETN (NYSEArca:VXX), the proxy I used for
the VIX itself. I view this as a good thing:This product is all
about term structure, not the underlying.
Here are a few other quick points on XVIX. First, it charges
0.85 percent. That's not cheap, but it's comparable to GTAA's 0.90
percent, DBV's 0.75 percent and RALS 0.95 percent.
Next, XVIX holders face uncertain tax treatment. The best case
is long-term capital gains upon a sale, but being taxed at
ordinary-income rates and other outcomes are possible when you
sell. (By the way, XVIX is far from unique in this respect.)
Third, XVIX uses an ETN structure, so you face counterparty risk
from the issuer, UBS. In other words, if UBS were to go bankrupt,
XVIX holders would be left holding the bag. Also, XVIX produces no
Last, consider using a limit order rather than a market order
because this is a thinly traded fund and limit orders are the best
way to get a price approximating fair value.
The bottom line is this:XVIX's low correlation with equities and
bonds validates the "absolute" part of its absolute returns goal.
Now it just needs to ratchet up the returns part of the deal.
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