Exposure to the CBOE Volatility Index (VIX) has been available since 2004 in the form of futures, and since 2006 in the form of options, but recently new exchange-traded products have offered retail investors an easier way to gain exposure to this popular measure of market sentiment. The most successful of these products so far has been Barclays’ VXX ETN, which has grown to a market cap of just under $1.5 billion. However, the VXX ETN has lost more than 90% of its value since its introduction in 2009, compared to a decline of only 60% for the VIX index. This poor relative performance is because the VXX ETN tracks an index of VIX futures, contracts that can incur negative roll yield.
The Volatility Index (VIX) is a calculation by the Chicago Board Options Exchange (CBOE) that is designed to measure the market expectation of future volatility implied by the S&P 500 stock index options prices. Inclusion of exposure to the VIX index in an investor’s portfolio can be desirable as a diversification and a hedge.
However, exposure to the VIX index can only be achieved by investing in VIX futures and options contracts. Barclays introduced in 2009 the VXX Exchange Traded Note that offers exposure to the return to a reference index that reflects the changes in return to a bundle of 1 and 2 month futures contracts on the VIX index, and thus, indirectly, the VIX index.
The VXX ETN is an extremely complicated and risky investment. Equity volatility is notoriously difficult to predict, and while its negative correlation with equity market movements may seem attractive as a long-term hedge, the fact that the VXX ETN’s
reference index tracks futures contracts instead of the actual VIX index means that substantial deviations between the two are likely. Investors should understand that the relationship between the VXX ETN and the VIX index is not straightforward, and that the relationship between the VIX and the S&P 500 indexes is also complex.
The VXX ETN should be considered only by investors who fully understand the term structure of the VIX futures market and who are prepared for the large, sudden movements and prolonged periods of decline characteristic of volatility exposure.
Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you or a family member have sustained losses in Barclays’ Exchange Traded Notes, due to your stock broker or financial advisor’s recommendation, call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552, or visit our website at: www.securitieslawyer.com.
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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