VIX futures have been mired in contango for some time, where distant month futures are priced higher than front month futures and thus the “roll” effect when the funds rebalance their futures upon expiration results in damaging losses for the funds tied to the VIX and rebalanced in this fashion.
However, we note that in the past two sessions, TVIX and VXX alike have demonstrated returns that express “backwardation” in the VIX futures market, which is the opposite state of contango (distant month futures are priced lower than current month futures), and this works to the benefit of “long” VIX products in terms of their performance via tracking the VIX (example, yesterday the VIX was up 2.59%, but TVIX, which is designed to deliver 2 times the daily returns of the index, was up a massive 10%).
Since the “Volatility” space has been an area of significant growth in the ETF/ETN market in the past several years, there is no shortage of products for the portfolio manager to choose from. However, one must be cognizant of the individual index construction methodologies that each product has, along with nuances in regards to leverage and the rebalancing schedule (monthly “roll” or otherwise), and also must closely monitor the VIX spot and futures markets themselves while understanding the positive and negative effects of contango and backwardation.
VelocityShares Daily 2X VIX Short Term ETN
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