How can VIX ETFs/ETNs performance differ so much?

S

Saltynuts

I was looking at comparisons of performance between some VIX ETFs/ETNs. Generally, over long periods, they are very close, with different decay rates of course. I.E. TVIX generally does 2x what VIXY does, which makes sense as TVIX is a 2x ETN and VIXY is a 1x ETF.

But sometimes there performance differs DRAMATICALLY. Like in Marchish 2012. VIXY declined in value much, much more than TVIX (adjusting for their 2x versus 1x percentage). On March 19 for example, VIXY was down 5.81%, which adjusting to make it 2x would make it down 11.62%. So you think TVIX would be down roughly the same 11.62%. Was it? No, it was UP 1.76%! There are lots of days like this.

Does anyone know why this is? ETF I understand hold the underlying VIX futures, and ETNs are based on the underlying VIX futures, so its seems they should be very, very close at all times (2x just holding twice the amount of futures). But they are not. What gives? And VIX during this time didn't even do anything crazy at all, so it wasn't some extreme situation or what not.

Thanks!
 
TVIX is an ETN, and I don't think they are holding the underlying futures. All they are saying is that they are tracking the index. The exact mechanics and formulas are explained in their 178 page prospectus.

VIXY on the other hand is an ETF, and actually _does_ hold the futures contracts.

For all products like this, ETNs and ETFs alike, it is important to understand that market prices are not the same as the indicative value (for ETN) or net asset value (for ETF). They are only identical, when new ETN/ ETF shares are created, or when there is net redemption. In all other cases, when shares are traded on the secondary market, the price is determined by supply and demand.


Cheers, Felix
 
Thanks Felix. I think I understand all that. I'm just trying to figure out why the performance can differ so much for really no good reason. ETFs hold the underlying futures, and ETNs (I think) basically relate the payment to be made on liquidation to what the portfolio of futures would be had they actually had them. So, putting aside credit risk, their performance should track very, very closely. There is credit risk with the ETNs, but this does not appear to be a factor as in the time period I mentioned VIX futures were pretty much stable and I don't see any sign where the issuer of TVIX was subject to credit risk scrutinies. It just blows my mind that the underlying can be the same (one 1x, one 2x), and 95% of the time they move together like they should, but then on some periods they get wacky and one moves up while the other down.

Note, I compared VIXY (1x ETF) and VXX (1x ETN), and they apparently did NOT have the wacky off days like versus TVIX.
 
And I understand they are both governed by market forces. I guess I am asking the question of why these differences can exist - why are they not arbed away, either by traders, or by the persons that can issue ETF shares if the prices get out of line?
 
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