I've read that article before and don't agree with it. For one, it's not that the VIX etf's are penalizing you vs the VX futures, the drag exists in the futures as well as that is where the drag is coming from. In other words, forget you are long VXX and just buy the VX futures and roll them every day. Over time you will lose a fortune as you should because the market has to charge you for the optionality. It's not free although I wish it was of course. It is possible for there to be drift of course where the demand for the ETF can exceed the actual futures. The Arb guys will keep it close but the arb guys know where the futures "should be" so the ETF's could drift. Again, the mistake he is making in my opinion is that it's not the ETFs fault for the decay. The decay is in the futures and the ETFs are simply replicating it.
I thought the article was making your very point. Contango in the futures drives the downward tendency in the long vol ETNs. The ETNs themselves aren't penalizing us, it's the futures they are based on that moves downward to meet spot Vix at settlement.
The whole term structure slopes downwards, ultimately landing at the Vix which is typically lower than the front month. (It's of course higher as of this writing, but that may change in a day.) SPX options being wasting assets, the back dated futures contracts must account for cost of carry, like a nat gas, etc. Thus the back months must be priced higher, all else being equal.
VXX, UVXY, XIV, etc., are committed to maintaining an average exposure to the first 30 days of the Vix futures. They do that by holding various quantities of the first two months in the term structure to average to 30 days exposure. E.g. when there are 15 days left before expiration in the front month, half the futures are in the front, the other half are in the second month out. Or at least that's how I read the prospectus.
Harwood's big point is that both months decay, and the fact of contango in both months is the primary cause of the decay in VXX. Thus, the daily roll has a negligible effect compared to that of contango generally. In any given day, only 1/30 of the contracts are rolled. That fraction is bought high and sold low, yes. But all 30 contracts are going down in price due to the contango in both months, and that is the real culprit behind the decay in VXX.
He goes on to point out that VXZ and TVIZ (the medium term VIX futures tracking ETNs--months 4 through 7) go down in a regular and pronounced fashion due to the effects of contango, and there is no daily roll in months 5 and 6. The decay in those funds mirrors that of the futures, yet roll pertains to an even smaller fraction of the futures held.
