Although they’re not designed as long-term investments, the performance of a pair of leveraged exchange traded products that invest in VIX futures contracts is shockingly bad in 2012.
VelocityShares Daily 2X VIX Short Term ETN (NYSEArca: TVIX) and ProShares Ultra VIX Short-Term VIX Futures ETF (NYSEArca: UVXY) were down 95.4% and 96% year to date, respectively, as of Sept. 27, according to Morningstar.
TVIX is an exchange traded note while UVXY is an exchange traded fund.
Some traders use them to hedge or speculate on market pullbacks since the CBOE Volatility Index, or VIX, typically rises when stocks fall.
“Volatility jumps in tandem with stock price crashes, spiking whenever the market collapses. Expected volatility, thus, serves as a proxy for market uncertainty, affording the VIX Index its common moniker of ‘The Fear Index,’” explains Morningstar analyst Abraham Bailin in a report on TVIX.
“Note that this offering is targeted at sophisticated investors looking to manage daily trading risks and was not designed to serve as a passive long-term core holding,” he adds. “The application of daily leverage on a fund held longer than one day can very quickly erode the holdings returns due to the pernicious effects of compounding arithmetic.”