This week on Twitter, Elwalvador made a great point about how well the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) has preformed, and that it’s actually moving more than iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) lately.
To refresh, VXX tracks a rolling 30-day VIX future, while VXZ tracks VIX futures four to seven months out. VXZ doesn’t have the roll and decaying futures premium problems of VXX, but it also won’t track the VIX itself as well, because futures that far out just don’t move that fast.
At least they shouldn’t. So what the heck is going on?
Well, as we know, VIX futures premiums remain persistently high.
Here’s how they looked on Thursday’s close:
Basically there is a 6-point premium out everywhere. And, as you can see, there’s no real difference anywhere four to seven months out, which means no expense to VXZ to roll any or every day. And that’s pretty typical.
VXX, on the other hand, basically has to roll September to October every day to maintain the 30-day duration, and that goes $3 against it.
So I think we can explain away that relative performance graph. Quite simply, VIX has drifted, near-month futures have had a perpetual steep upward slope, and VXX gets caught both ways.
Meanwhile, assumptions of a higher VIX out in time never go away. It’s almost a perfect setup for VXZ. And that’s great if you own VXZ as a portfolio hedge. It’s actually higher while the SPDR S&P 500 (NYSE: SPY) is pretty close to unchanged, and VIX and VXX are down.
The issue, though, is what happens if the market crashes.
In that case, if you own VXZ as a portfolio hedge (or speculative tool), it likely disappoints. Those VIX futures out four to seven months already price in a sizable uptick in volatility. If the VIX goes into the 40s, they may only lift a few points from here.
But VXZ does work perfectly in a low-octane drift like we have now. And I think that scenario is more likely than a meltdown when everyone expects a meltdown.
Follow Adam Warner on Twitter @agwarner.
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