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VIX Offshoot XIV Takes Bumpy Ride to Top

The inverse ETN has returned 82% in its 6-month lifespan


I have periodically made fun of the whole “Volatility as An Asset Class” notion. Not that there’s anything wrong with options trading investors tracking the CBOE Volatility Index (CBOE: VIX) and volatility, I mean that’s kind of what I do for a living. Just that the actual trading products designed to track said VIX often don’t work as an asset class for anything but short term trading. In other words, trade; don’t hold most of these products.

There is a glaring exception though, the VelocityShares Daily Inverse VIX Short-Term ETN (NYSE: XIV). But, alas, XIV is actually an inverse ETN, so it is designed to move in opposition to Our Favorite Dog of all, the iPath S&P 500 VIX Short Term Futures ETN (NYSE: VXX). As my friend Bill Luby noted yesterday “During the course of its first six months of trading, XIV has managed to return 82% to anyone who was fortunate enough to buy some of this ETN when it launched.”

Sounds great, but it took a quite bumpy ride to get there. As Bill reminds me, XIV pared a third of its value in a month around the time of the Japanese earthquake.

Now with only six months of history to go on, I really would refrain from making blanket statements about what XIV will do forever. Like any leveraged and/or inverse ETF, you have compounding issues to deal with. If VXX churns, it is possible XIV drifts just on simple math.

I will say this though. The last few months were relatively typical for any random six-month slice of VIX life. It spent most of its time alternating between flat lines and slow drifts, but with a couple brief spikes along the way (biggest being the Japanese nuclear meltdown fears that Bill mentions). And VXX as we know will drift on both flat and declining VIX. All of which of course bodes well for XIV going forward.

There’s less likelihood of sizable declines in VIX itself when you’re starting at a 15 full, so it’s not real likely XIV repeats that 82% lift over the next half year. And you always have random volatility explosions to deal with. You can pretty much expect to see two to four of those per year. But all that being said, I would agree with Bill’s points, XIV should continue to rally over time.

Follow Adam Warner on Twitter @agwarner.

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