New VIX ETF.....VXUP and VXDN

Discussion in 'ETFs' started by S2007S, May 18, 2015.

  1. S2007S

    S2007S

    Anybody who trades the VIX might like these new etfs coming out tomorrow, Im going to be paying attention to them, interesting to see what becomes of these ETFs since they are releasing them with the VIX at historical lows....I know that if the VIX were to spike above 40 say sometime in the next 6 months I would be going long VXDN with a large % of my portfolio knowing by historical measures that the VIX barely stays above 40 for no more than a few days...so these new VIX etfs will be something to look forward to...



    New VIX ETF launching
    Bob Pisani | @BobPisani
    Friday, 15 May 2015 | 10:41 AM ET

    There's a potentially important new ETF launching next Tuesday, May 19th, which allows investors to invest in the well-known CBOE Volatility Index.

    Will it do a better job of tracking the VIX than other ETF and ETN products? The answer is likely yes, but there are some wrinkles.

    The CBOE Volatility Index measures the intensity of put and call buying for the S&P 500 for a 30-day period and is often referred to as the "fear index."

    The new Volatility ETF is attracting more attention than usual because the brains behind it is Robert Whaley, the man who invented the VIX.

    His company, AccuShares, will float two different VIX ETFs: 1) the Spot VIX Up Class (VXUP), which seeks to track the VIX over a one-month period, and 2) the AccuShares Spot VIX Down Class (VXDN), which seeks to track the inverse performance of the VIX over a one-month period.

    Why an inverse ETF? It has to do with how the ETF is structured.

    Other ETFs exist to track spot indices—including commodites like oil—but they buy future contracts in their respective sectors. When the contracts expire, the next contract has to be bought, which greatly increases the cost of investing, since most future contracts are in contango, that is, the cost of the contracts further out are more expensive.

    So you are usually buying high and selling low.

    That creates tracking errors from the index. In other words, most investors find the investment they bought does not track the spot index they want to follow.

    AccuShares is trying a different approach with this VIX product, and with other spot indices they will be launching in the near future. They hold cash and cash equivalents. Each ETF has an "up" asset class and a "down" asset class. Assets are swapped back and forth, depending on the increase or decrease in the spot price.

    On the 15th of every month, everything is recalibrated. So you are essentially making a bet on where the VIX might be in the middle of the month.

    With that said, there are a couple important details:

    1) This is not free. There is a management fee of about 90 basis points a year.

    2) There is a monthly distribution. Because this is cash, any accrued interest is paid out to shareholders (they park the cash in Treasurys). While it does create tax issues, it is treated as ordinary dividend income and will be reported on a 1099 form.

    3) if you own the Long VIX there is a "tail risk insurance premium" that is paid the Short VIX of 15 basis points a day.

    Why? Whaley pointed out to me that the VIX is not like a stock. That's because everyone knows that at some point the VIX will spike up—in some cases dramatically—in response to some event. It will also come back down again.

    This has a very simple implication: at some point, you are going to make money if you buy the VIX, because we all know it is going to go up at some time. You just have to hold it, and voila! At some point it will go up, and you will make money.

    What this means is that shorts are disadvantaged by definition. Who is going to sell you this product knowing that you are guaranteed to make money at some point, and they are guaranteed to lose money?

    No one. So longs have to compensate the shorts for the risk of being short.

    Why 15 basis points? Whaley tells me that is the point at which his team felt that market participants were willing to make a market in the products.

    So, does it track the VIX? Let's take a look at an example.

    On a daily basis, it seems to be pretty close. For example, from May 4th to May 5th, the VIX moved 11.4 percent, from 12.85 to 14.31.

    If you deduct the 15 basis point fee, you have a gain of 11.25 percent, minus a management fee of roughly 0.0025 percent, the one-day cost of that annual 90 basis point fee, which gets you to 11.2475 percent.

    VIX up 11.4 percent, you get 11.2475 percent. Not bad. Pretty close.

    But that is for one day. The tracking error gets larger if you hold it for longer periods.

    Suppose you invest $1,000 in the Up ETF (VXUP) on the 15th of the month and one month later the VIX is up 10 percent, so the value of the fund is $1,100.

    Here's what you will have: 1) the $100 from a 10% gain, 2) whatever interest rate you get from short-term Treasuries (a few pennies), because the fund parks the cash here, 3) less the daily 15 basis point fee, which over thirty days would amount to $45, 4) minus the management fee of one-twelfth of 90 basis points, which is roughly $0.77, let's call it $1.

    So you'd have a gain of roughly $100-$45-$1 = $54 or a roughly 5.4 percent gain.

    That is not the same as a 10 percent gain, BUT you would get something that is directionally correct.

    Bottom line: you'd have an index that tracks the VIX, but how closely depends on how long you hold it. You are paying a significant fee for the option-like privilege.

    That sounds like an awful lot of fees, but when you compare how much is lost by the cost of carrying futures in the alternative products that use VIX futures, it may be worth it.

    What does all this mean? You can definitely make money if you have a strong hunch that volatility is going to spike in some period in the not-too-distant future.

    But because of the costs and distributions, this is not something you would want to hold for any length of time. It's the kind of trade you would want to make a quick directional bet on.

    Whaley agrees that this is for short-term trading bets, and in case you don't get this point, it's spelled out in the prospectus: "Investors who do not intend to actively manage and monitor their Fund investments at least as frequently as each distribution date should not buy shares of the Funds."

    Whaley says he has plans to launch many other target spot indices—largely for commodity indices in oil, natural gas, agriculture, and metals.

    These products should not need to have the "tail risk insurance premium" the VIX products have, and so they should more closely track the underlying indices, even over longer periods of time. That would be significant.

    Is investing in volatility ever going to be an asset class that you can buy along with stocks, bonds, commodities? Tom Lydon, editor and publisher of ETF Trends, told me it might become an asset class if there was something available to buy that correlated to the VIX.

    This may or may not be that instrument, but I am doubtful volatility will become a big asset class. What I do believe is that it can be a very useful tool to manage short-term risk, and that, as Whaley pointed out to me, has great value when markets change on a dime on geopolitical and macroeconomic events.
     
  2. MrN

    MrN

    Too funny.
     
  3. from here: http://seekingalpha.com/article/318...l-perform-similar-to-inverse-volatility-funds

    Without contango to help it, VXDN will only perform well over a monthly period with a declining VIX, and is dissimilar to XIV/SVXY as it will probably perform terribly over a longer period of steep contango.



    I've back calculated VXUP and VXDN retroactively to the Jan 2, 1990 VIX launch, creating a VXUP Index TR and VXDN Index TR based on the rules outlined in the prospectus. To simplify the MGMT fee, I deducted 0.003785%/trading day from each fund. The tail risk transfer (if applicable) occurs at every regular and special distribution. However, I've isolated the MGMT fee and tail risk transfer within each index in between distribution dates to ensure 75%+ special distributions, and 90% measuring period caps are calculated properly. All distributions are retained by each index to make them total return indices (TR).


    Starting with $1 billion in each index, here are my results:


    VXUP Index TR:
    Starting Value (Jan 2, 1990): $1,000,000,000.00
    Current Value (May 15, 2015): $841.37
    Total Return: -99.99992%
    Annualized Return: -42.39%
    Average Daily Return: -0.0242%
    Max Daily Return: +62.57%
    Min Daily Return: -29.58%


    VXDN Index TR:
    Starting Value (Jan 2, 1990): $1,000,000,000.00
    Current Value (May 15, 2015): $43,778.49
    Total Return: -99.99562%
    Annualized Return: -32.68%
    Average Daily Return: +0.1969%
    Max Daily Return: +100.99%
    Min Daily Return: -75.11%


    Comparison with the VIX, VXX's Index & XIV's Index from Dec 20, 2005 to May 15, 2015:


    VIX: +10.63%
    VXX: -99.47% / VXUP Index TR: -99.24%
    XIV: +364.22 / VXDN Index TR: -99.95%
     
  4. S2007S

    S2007S



    so its a given that we can short VXDN and VXUP and over the course of years profit from it no matter what the circumstances.......
    I wish there was just a simple ETF that just followed the VIX...period. I don't know what is so hard, the vix trades around 12, why not come out with a simple VIX etf that tracks it point for point, DONE!!!

    Im watching VXDN and VXUP trade today, not much volume at all, not only that but they are moving huge in %% terms

    VXDN is off almost 10%
    VXUP is up over 6%

    the bid and ask is all over the place, I wouldn't touch these until volume picks up and they are easier to trade until then Im just watching..rather trade XIV
     
  5. this is not easy. VIX is an index. it will always go up & down => free lunch.
    if VIX were an etf, there would probably be nobody to take the other side of your position.

    if we could make ETPs of indices, I'd love to trade the NASDAQ UPTICK-index. buy every day at market open and sell at market close. every day pure profit :))

    I had thought the same before. There is not even a short sale fee on the ETP.
    But unfortunately, it will not be easy like this.

    This ETP is crazy, it's certainly the craziest ETP I know. OK, it's the first day of it trading and probably it will need some time to develop, but at the moment it's outright crazy.

    Yes, spread is 1% as you noted. With a very "deep" market. I have level 2 quotes and when I looked today there was 1 share available to sell and 5 to buy. With a 20ct (1%) spread. wonderful...

    But also if you could get in... in today's pretty calm and boring market that ETP jumped/fell a whopping 10%. I wonder what will happen on days where there will be a 1% drop in SP. will the ETP double then? I don't know.
    Personally, I will not short both ETPs. In theory, it's a guaranteed way to make money, but... what if that ETP just behaves as irrational as today, and having a 3% decline in SPX will - I don't know, ten-fold the VXUP... too dangerous, until this product has established.

    There has been a lot of attention to these ETPs, but if they will behave like today, they are a clear non-starter. I prefer the good old VXX and XIV, because they consist of something that really exists and is traded everyday - VIX futures.
     
  6. newwurldmn

    newwurldmn

    A lot of vol desks are working on understanding this. Given the 15 bps daily fee this isn't different than a rent controlled version of the vix etns that are based on the futures.

    I think the expectation is that dumb retail money will buy thinking they are getting spot vix and the vol desks will arb them.
     
    cdcaveman and i960 like this.
  7. seems to be another SCAM product.. like THE STELLAR VXX.
    this product created by BARCLAYS. .has been a MONEY SPINNER for them...
    Vance Harwood wrote some nice articles. about how.- this has taken in like several billion over the years and no one is complainnig. ha ha.

    http://sixfigureinvesting.com/2013/04/how-does-vxx-work/



    so other folks also want to get in on the gravy train...

    ANY VIX related Product is a SCAM... the house always wins... u want to bet on a crash
    just buy some OTM index puts and PRAY.
     
  8. I don't understand how this product works. I don't have enough interest to read up on it, but if anyone could explain it, i would appreciate it.

    The OP seems to suggest that assets get passed back and forth between the up an down ETFs to reflect movement in the VIX. But how could that work unless equal amounts were invested in each ETF?
     
  9. i960

    i960

    This is why when I want to trade VIX I just go long or short the futures or future spreads. Sure they're not immune from contango but its a hell of a lot simpler.
     
  10. Sig

    Sig

    They've essentially got several mechanisms that are supposed to arbitrage away differences between the NAV and the traded price, plus a daily exchange of value between the two to take into account the roll. They mostly rely on creating equal pairs of the two ETFs, i.e. if you want to create shares you can only create an equal amount of both, which then instantly trade at an equal but opposite discount/premium to their NAV. Periodically they try to eliminate the difference between the discount/premium by adjusting prices and distributing paired sets of the shares to existing shareholders, which once again instantly start trading at an equal and opposite discount/premium. The bottom line if you game your way through all the mechanisms is that they can't work and the two will always trade away from their NAV in equal and opposite directions based exactly on the futures contango/backwardation plus the impact of the roll fee.
    As i960 mentioned, you get the exact same exposure by trading the futures with a fraction of the complexity, no management fees, and probably lower margin. If you don't want futures, there are lots of other VIX ETFs that do the same thing, again with less complexity and lower fees. Unfortunately it looks like we're still awaiting the holy grail of a tradable VIX index.
     
    #10     Jun 1, 2015