Looking at VelocityShares Daily 2X VIX Short-Term ETN (NASDAQ:TVIX) can remind an investor of one of the more memorable lines from the movie Fight Club: “On a long enough timeline, the survival rate for everyone drops to zero.”
Volatility products — typically structured as exchange-traded notes (ETNs) — don’t sink to zero, but it is usually only a reverse split that saves them from going there.
One example is the iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX). From 2009 through 2016, VXX never posted an annual gain, and seven of its eight yearly losses were deep into the double digits. That underscores the point that volatility ETNs are short-term trading instruments and spell troubled when held over long holding periods.
Which brings us back to TVIX.
What TVIX Tries to Do
TVIX allocates 83% of its weight to front-month, short-term CBOE VIX futures and another 17% to the next-month, short-term CBOE VIX futures.
This ETN attempts to deliver twice the daily returns of the S&P 500 VIX Short-Term Futures Index, which “utilizes prices of the next two near-term VIX futures contracts to replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts. This results in a constant one-month rolling long position in first and second month VIX futures contracts,” according to S&P Dow Jones Indices.
Like many volatility ETNs, TVIX has had its share of controversies over its trading life. In fact, it was the epicenter of one of the most infamous incidents involving a volatility ETN.
In a two-day span in 2012, TVIX plunged 40% as volatility swooned, and Credit Suisse AG (ADR) (NYSE:CS) — the ETN’s issuer — stopped issuing new shares of TVIX. That made it more difficult for traders to transact in TVIX at a time of elevated market stress and made attempted departures from the volatility ETN that much more punishing.
2017 has been particularly miserable, with the ETN down by 85% roughly three-quarters into the year. Still, some traders have not given up hope that volatility will one day return and that TVIX will benefit.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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