Wednesday, August 10, 2011

XIV is stealing my money!

With current volatility exceeding 40, it seemed like a good idea to short the VIX. Two very popular ways to do this is either to short VXX or go long XIV. I choose to go long XIV a couple of days ago, after making sure that it tracks the inverse daily return of VXX.
Now a strange thing has happened that both puzzles me and pisses me off: yesterday there was a tracking error of 2% between the two and today another 1%, both in my disadvantage. It seemed like somebody 'stole' 3% of my position! At this moment I am less than happy with this XIV product.
Take a look at this chart:

Here I plotted daily returns of VXX and XIV against each other, where the outliers have been plotted in red. Please note that there are another 2 outliers of similar magnitude, occuring on  4 and 5 January 2011, but these two cancel each other out pretty nicely.
I thought that both etfs were based on the same SPVXSTR index, but while their intraday path relative to each other is very  stable (no arbitrage possibilities), the tracking offset was present throughout the whole day.
I understand that XIV could get a positive tracking error because it was banned from short selling on both days (just like VXX), but a negative tracking error is a mystery to me.

Can someone shed a light on what is going on here???


  1. Do you know how it replicates inverse VXX? Maybe it tries to be short it...

  2. Why did you choose to buy the XIV instead of shorting the VXX?

    I am attempting to load up on VXX shorts, but they are hard to borrow.

  3. @Harmless:
    A short VXX position is more likely to give you a margin call if things go wrong.

  4. This is a very crowded trade now, from retail, HFs, and prop desks. The size is at least half of VXX if not more, defeating the original thesis. The VIX term structure, as a result, is becoming much flatter as the trade became a mainstream knowledge. Thanks to the relentless self-promotion by author of VIX and More blog. Pity, it self-destructs due to its own success. Easy money disappears fast.

  5. Backwardation is the problem.

  6. @WL: I disagree. Selling volatility is a well known game, that has been played for a long time. I don't think that a blog like 'VIX and more' changes much.

  7. @Ralph: I don't see how backwardation explains the gap between the VXX and XIV.

  8. read prospectus first,


  9. This data point is interesting/strange but there is a bigger problem with XIV and VXX. Both ETFs became poorly correlated with the VIX between 7/29/2011 and 8/22/2011. Prior to 7/28, the XIV and VIX enjoyed a median daily percentage change equal to roughly +/- 46% the VIX.

    The error in the predicted XIV/VXX using the 0.46 rule could be calculated and this number was also fairly stable and had a relatively small standard deviation. Between 7/29 and 8/22, the XIV and VXX had daily moves on 11 out of 17 days that were outside the 95% confidence interval.

    There are a few days within this date range which were very strange:
    - 8/3, SPY up 0.54%, VIX down 5.69%, XIV down 0.83%
    - 8/8, SPY down 6.51%, VIX up 50%, XIV down 14.6%
    - 8/12, SPY up 0.67%, VIX down 6.77%, XIV down 0.73 %

  10. isn't this just simple math, if something goes up 30 pct, an inverse instrument of that goes down 30 pct, if the instrument the next day goes down 23 pct (break even), the inverse instrument goes up 23 pct (leaving it at -13.8). Maybe this is not what you guys are discussing

  11. So, How is your investment in XIV is doing? This is not a good product during high volatility. Even if it will be ideally reverse to VXX. Historically, ideal performance of XIV versus long term performance of -VXX is only 30%.

  12. interesting post -- this is the best time to get into the XIV when it is under $6.
    when volatility is low and you expect a higher vix switch to the VXX

  13. If both XIV and VXX have such poor performance why not shorting them both at the same time?
    this position in hedged and can benefit from both ETF's decay. Can you please check it out with matlab?

  14. @Anonymous: in theory, you could arbitrage the relative performance by shorting them both. However, as these two are inverse, one would have to rebalance frequently (continuously ?) this rebalancing would negate the theoretical profit.

  15. vxx is not inversed.
    Looking at the their performance in the lat few month vxx went approximally from 20 to 40 and xiv from 180 to 60, losing 100 % on one of the shorts and earning 200 % on the second.
    I dont understand why you need to rebalance this position , the ETF's are daily rebalanced.

  16. Hi Jev,

    XIV does a bad job on the long term due to tracking error costs which I wrote about and modeled here:

    But as a daily inverse of the vxx its quite ok.