ETF Trends
ETF Trends

Volatility-linked ETFs that track VIX futures contracts were down sharply for the fourth straight session Tuesday as fear drains from the market after the Greek elections.

iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) fell nearly 4% in early U.S. trading Tuesday.

The exchange traded note is down more than 20% from its June 13 closing price.

The ETN follows CBOE Volatility Index futures, not the spot price. The VIX is known as Wall Street’s “fear gauge” because it rises when investors are seeking protection in the options market.

VXX has a market cap of $1.5 billion, according to issuer Barclays. [VIX ETFs Thrive on Volatility and Risk Aversion]

Like all exchange traded products designed to track futures contracts, VXX can be hurt by “contango” in the futures market. [Caveat Emptor – Volatility ETFs]

Futures-based funds don’t hold the contracts until expiration. Instead, they “roll” the contracts to maintain exposure to the asset class.

“When the prices of longer-dated futures contracts are above the current spot price of the commodity, the market is said to be in a state of contango. Futures contract prices converge to spot as they near expiration, causing a phenomenon. Under contango, this phenomenon creates what is known as a negative implied roll yield because rolling futures contracts would initially result in a loss,” investment researcher Morningstar explains in an analyst report on VXX.

“The opposite holds for markets in which longer-dated futures price are lower than spot. These markets are said to be in backwardation, and rolling futures contracts results in a gain,” said Morningstar analyst Abraham Bailin. “VIX futures are largely used to hedge, or insure against volatility. For this reason, the VIX futures curve generally remains in contango, so take heed before establishing a long-term long position here.”

VXX is among the top-10 sellers among exchange traded products in 2012 with investors fearful over Europe’s debt crisis and the health of the global economy. [The 10 Best-Selling ETFs of 2012]

iPath S&P 500 VIX Short-Term Futures 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.