Simple Tests of VXX as Diversifier

Posted in Strategic Allocation, Volatility Effects

 

Market volatility tends to rise as returns fall. Does adding a proxy for short-term U.S. equity market volatility to a diversified portfolio improve its performance? To check, we add iPath S&P 500 VIX Short Term Futures (VXX) to the following mix of asset class proxies (the same used in “Simple Asset Class ETF Momentum Strategy”):

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)

First, per the findings of “Asset Class Diversification Effectiveness Factors”, we measure the average monthly return for VXX and the average pairwise correlation of VXX monthly returns with the monthly returns of the above assets. Then, we compare cumulative returns and basic monthly return statistics for equally weighted (EW), monthly rebalanced portfolios with and without VXX. We ignore rebalancing frictions, which would be about the same for the alternative portfolios. Using adjusted monthly returns for VXX and the above nine asset class proxies from February 2009 (first return available for VXX) through April 2013 (only 51 monthly returns), we find that: (more…)

Please or subscribe to continue reading...
Gain access to hundreds of premium articles, our momentum strategy, full RSS feeds, and more!  Learn more

Already Have An Account?
Questions?