Discussion in 'ETFs' started by maninjapan, Jun 20, 2017.

  1. I have been doing some analysis of the two volatility ETF's, XIV and VXX. My understanding is XIV should basically be a mirror of VXX. However from my results, based on totals of daily % change short VXX clearly outperforms long XIV and I can't figure out the cause of the big difference here. What am I missing?
  2. MattZ

    MattZ Sponsor

    They may have completely different cost structures as ETFs.
  3. EDIT: I wrote ETF's, actually they are ETN's

    Thanks. From what I can find, VXX is charged an annual fee 0.89% calculated daily. XIV is higher at 1.35%. This counts for some of the difference, but still small compared to the total difference. On the right track though I think. The devil is in the details.... Will keep on digging....
  4. quick update. still going through details but the answer appears to be in the following (copied from an article on XIV)

    • Understand that XIV does not implement a true short of its tracking index. Instead, it attempts to track the -1X inverse of the index on a daily basis and then rebalances investments at the end of each day. For a detailed example of what this rebalancing looks like see “How do Leveraged and Inverse ETFs Work?
    • There are some very good reasons for this rebalancing, for example, a true short can only produce at most a 100% gain and the leverage of a true short is rarely -1X (for more on this see “Ten Questions About Short Selling”. XIV, on the other hand, is up almost 200% since its inception and it faithfully delivers a daily move very close to -1X of its index.
    • Detractors of the daily reset approach correctly note that XIV and funds like it can suffer from volatility drag. If the index moves around a lot and then ends up in the same place XIV will lose value, whereas a true short would not, but as I mentioned earlier, true shorts have other problems. However, daily reset funds don’t always underperform. If the underlying index is trending down, they can deliver better than -1X cumulative performance. For more see “A Hat Trick for Inverse / Leveraged Volatility Funds
  5. Just a guess here, but I believe some ETNs are backed by futures contracts (as opposed to ETFs that are backed by shares) and thus may be vulnerable to price erosion when 1) slippage is introduced due to contract rolling and 2) far-dated contracts decline in value over time if the contracts are in contango.

    Not 100% certain about this, but I think it may be the reason.
    lindq likes this.
  6. The VelocityShares Daily Inverse VIX Short-Term ETNs (the ETNs ) are senior unsecured obligations of Credit Suisse AG ( Credit Suisse ) acting through its Nassau branch. The return on the ETNs is linked to the inverse of the daily performance of the S&P 500 VIX Short-Term Futures Index ER less the investor fee


    The S&P 500 VIX Short-Term Futures Index TR is designed to provide access to equity market volatility through CBOE Volatility Index (the "VIX Index") futures. Specifically the S&P 500 VIX Short-Term Futures Index TR offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve.
    Last edited: Jun 22, 2017
  7. Right, but essentially the same index in reverse. Total return includes interest accrual on the notional value of the index based on the three-month U.S. Treasury rate where the Excess Return version doesn't . And as noted in a previous post the fees don't come close to explaining away the difference in performance.

    From the research I have done so far known issues with leveraged and inversed ETFs appear to be the most probably cause so far.