REX Shares, LLC recently announced two new exchange traded fund (a long VIX fund and an inverse VIX fund) that will attempt to maintain a weighted average time to expiry in VIX futures of less than 30 days at all times. The aim is to more closely track spot VIX, which is an un-tradeable index of implied volatilities on S&P 500 Index options. It appears the strategy will be utilizing the newly created weekly expirations for VIX index futures.
Ever since the launch of VXX in 2009 (post the 2008 crisis of course) investors have been trying to figure out how to obtain long volatility exposure to protect themselves from a repeat of 2008. However, the plethora of exchange traded products (ETPs) that have launched in the VIX futures space have failed to deliver what longer-term investors were seeking. Since VXX’s inception in January 2009 through the end of April 2016, the fund has lost 99.75%. This loss has been a function of the nearly constant and large negative roll associated with VIX futures. This topic has been the subject of much study. Here is one of many papers showing how there are profit opportunities to be had taking advantage of the predictable shape of the VIX futures curve.
While the addition of inverse VIX products may provide better investment opportunities, even they are not a panacea. As was recently pointed out at the VIX and More blog, every single VIX related ETP (long or short) lost money in 2015. I must admit, I remain skeptical of any explicitly long volatility product as it seems investors are willing to consistently overpay for market insurance, which, as can be seen by long-term performance of these products, can be quite costly overtime. While they may provide value as a short-term hedge, timing these hedges can be extremely difficult, and most investors are likely to buy insurance right after they really need it and sell it before they need it again. I really don’t think the advent of weekly futures is going to change this outcome… For some related thoughts, the education section of our October Monthly Alternatives Briefing touched on the difference between no correlation and what tends to be very expensive negative correlation.