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