[I]f you want more time for that VIX rally you’re sure is going to happen, you’re going to have to pay more and more premium. Go out three months, for example, and that VIX ‘bottom’ you bought is four points above the actual VIX,” Warner notes.
“Another way to look at this is that everybody ‘knows’ the VIX is going to rally, and the market is already pricing that in,” he adds. “Yes, the whole complex will lift if the VIX moves significantly higher. But the gains in a tradable VIX product will severely lag gains in the VIX itself.”
Volatility products are designed to “roll” the contracts over periodically to maintain exposure to VIX futures. They can lose money on this trade when longer-dated contracts are more expensive than the front-month contract, or when markets are said to be in “contango.” [Double Whammy for Volatility ETFs]
VXX, which is an exchange traded note, is down nearly 80% for the trailing 12 months.
“This ETN is designed for use as a tactical trading tool, with prospective holding periods to be measured in days, not weeks,” writes Morningstar analyst John Gabriel in a profile of VXX.
“This is because holding this ETN exposes investors to excessive drag on their portfolios due to the sharp negative roll yield related to rolling futures as they near expiry,” Gabriel points out. “In 2012 when the spot VIX fell 23%, this ETN’s net asset value plunged more than 78%. And in 2011, despite the fact that the spot VIX rose 32%, this ETN’s NAV fell about 5%. A buy-and-hold investor could have had the right idea but would have been burned by contango regardless.”
iPath S&P 500 VIX Short-Term Futures ETN
