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.