Friday, July 23, 2010


A new inverse VIX ETN is coming out as posted about on VIX and More: XXV and the New VIX ETN Landscape and by Adam Warner at Too Err Is Blog-Human | Blog - Daily Options Report. Outside of roll-yield considerations, I disagree with their assessment that it might be a good long-term hold. This is due to one crucial detail regarding what Adam Warner considers to be the "index" by which the XXV performance is to be calculated. Mr. Warner seems to define the "index" as the performance of VXX, while I assume the "index" will be a more independent measure of VIX performance, without the rebalancing drag and management fee drag. So while Mr. Warner assumes that the relative underperformance of VXX over time will serve to enhance XXV's returns since XXV's performance will be calculated as the inverse of the index's, I believe that VXX's underperformance will not enhance XXV's returns at all.

I'm not saying that a strong contango in VIX futures won't help XXV's returns--it definitely still will. What I'm saying is that I believe XXV and VXX will both fluctuate around an ever-decreasing center of mass, due to rebalancing and fees, that will cause it to be a poor investment choice long term, like many other ETFs/ETNs. Again, to re-iterate, this is aside from roll yield considerations. Basically, over time, if you would like to buy XXV, the better choice will be to short VXX.

See my earlier post Uptrending Equity: Volatility arb to see how I'm profiting from the presently large VIX contango.