Chart of the week
Price Change of Long and Short VIX ETPs
As low volatility persisted through 2017, products that offer inverse exposure to the VIX saw significant increases in both their popularity and price.
For example, during the 12 months ended Jan. 31, 2018, the VelocityShares Daily Inverse VIX ETN (ticker XIV) experienced a 107% price increase and saw more than $650 million of net inflows. With volatility remaining stable and the VIX futures curve positively sloped, short exposure to the VIX during this period proved to be a profitable trade.
That all changed in early February when the VIX moved sharply higher. Over the course of just five trading days, XIV’s price went from $129.35 to $5.10, a decline of 96%.
Conversely, the price of the iPath S&P 500 VIX ETN (VXX) increased as the VIX moved higher, climbing by 90% over the same five-day period. While this move is large on an absolute basis, it came on the heels of a 12-month 61% decline. February’s move helped VXX recover some of that loss, but it was still well short of the 160% gain necessary to break even.
Looking back on these circumstances, at least two observations can be made:
- Products that offer explicit short exposure to the VIX have the potential to experience outsized losses in a relatively short amount of time.
- Products that offer long exposure to the VIX may be expensive when used as an ongoing risk-management solution and may not make up for their cost (i.e. losses) even when they do finally react to higher volatility.
Unless otherwise noted, data is sourced from Bloomberg.
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