Enhanced VIX Futures ETNs
May 31, 2012 - Strategic Allocation, Volatility Effects
Are there exchange-traded notes (ETN) based on S&P 500 Index implied volatility (VIX) futures, or combinations of such ETNs, that are attractive for absolute return and diversification? In the May 2012 version of their paper entitled “Volatility Exchange-Traded Notes: Curse or Cure?”, Carol Alexander and Dimitris Korovilas examine the behaviors of simple (first generation) and enhanced (second generation) ETNs constructed from VIX futures. They focus on: (1) roll return or yield, the loss (gain) of maintaining a position in VIX futures by continually rolling from a near to a far maturity contract when in contango (backwardation); and, (2) term structure convexity of VIX futures, the generally greater magnitude of roll return when rolling between contracts near to maturity versus between contracts far from maturity. To extend the sample period, they replicate recently available ETNs back to December 2005 using S&P constant-maturity VIX futures indexes and March 2004 using daily closes of VIX futures (debting respective annual ETN fees). Using daily closes for all VIX futures contracts, 30-day (VIX) and 93-day (VXV) S&P 500 implied volatility indexes as calculated by CBOE, S&P constant-maturity VIX futures indexes, one-month (VXX) and five-month (VXZ) constant-maturity VIX futures ETNs and two recently launched second-generation VIX futures ETNs (XVIX and XVZ) as available from late March 2004 through March 2012, they find that: Keep Reading