A volatility-linked exchange traded product designed to move in the opposite direction of the VIX has more than tripled in price over the past year.
VelocityShares Daily Inverse VIX Short Term ETN (NYSEArca: XIV) has rocketed 221% for the 12 months ended Dec. 5, according to investment researcher Morningstar.
The incredible move shows how profitable betting against volatility has been in 2012. [The Five Top-Performing ETFs of the Year]
XIV is an exchange traded note that provides the inverse, or opposite, of the daily performance of an index of futures contracts based on the CBOE Volatility Index, or VIX. The ETN charges a fee of 1.35% and has a market capitalization of about $355 million.
XIV is “an unqualified success in terms of assets and performance,” writes Bill Luby at the VIX and More blog. The VIX is often called Wall Street’s fear gauge because it tends to spike when the stock market crashes. The index measures expectations of volatility for the next 30 days based on S&P 500 options.
So XIV is similar to a bet against the VIX and volatility. However, it should be noted that XIV and other volatility-linked products track VIX futures, not the spot price.
Over the last three months, XIV has traded an average of more than 12 million shares per day, making it the second most popular VIX-based exchange traded product after iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), Luby adds.
“Part of the reason for XIV’s popularity is no doubt due to performance,” he said.
However, a falling VIX and “contango” in the futures market have crushed exchange traded products that take the other side of the volatility trade and go long.
A 200% leveraged exchange traded note designed to track CBOE Volatility Index futures contracts has lost 97% of its value this year. VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) has dropped below $1 a share. [Volatility ETFs: Is TVIX Going to Zero?]
The three volatility products – XIV, VXX and TVIX – are structured as ETNs, which are debt instruments issued by banks that promise to pay the return of an index, minus fees and taxes.
Despite the impressive long-term performance of XIV, inverse and leveraged products are generally designed as trading vehicles rather than buy-and-hold investments.
“The ability to predict what volatility is going to be on any given day or over the long haul remains suspect, but investors lucky enough to bet on decreased volatility so far in 2012 have more than doubled their money,” Investopedia reports.
Brendan Conway at Barron’s calls XIV a “kind of backdoor bullish bet on the stock market.”
VelocityShares Daily Inverse VIX Short Term ETN
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.