When you think of asset classes you normally think of things like Stock, Bonds, or Real Estate. I think of an asset class as something that simply has the ability to rise in value or appreciate over time. Given volatility's natural tendency to depreciate over time I think of inverse volatility as a great candidate for asset allocation in a long term portfolio. What are you thoughts?
Is Volatility an Asset Class?
- Thread starter Apbideas
- Start date
No. An asset is defined as something that can generate cash flows. Not something that goes up in time. It has value in time. There is such an asset that generates cash flows from short vol and that is equities. They benefit over time from a lower risk premium since their future cash flows are discounted over time by this risk premium therefore lowering the risk premium raises the present value of those future cash flows.
XIV is an instrument that can be used to benefit from lower risk premiums in the market but there is some probability (and a good one at that) that it could go to zero. Almost all ETF's have credit risk and must be appropriately discounted. Second, at the end of the day, they are complicated swaps which under certain conditions could cause them not to perform in the way in which they were designed. Third, very few ETF's survive long term because of this. The ones you see are the winners. You don't notice all the ones who have gone under and there are many that have. So Caveat emptor.
It should also be with expectation to provide future economic benefits, shouldn't it?
Technically Gold does generate cash flows. It provides the real return of money. It's not a cash flow that flows into your bank account each month but those cash flows are embedded in the price of gold and it's one reasons it appreciates or depreciates across time.
Volatility cannot go to zero but XIV certainly can and no doubt will at some point in the future. XIV is nothing more then a complicated swap. It's aim is to replicate the behavior of another derivative. People can call anything whatever they want to.
XIV is rebalanced daily. How can it go to 0 under normal conditions? Only some fat tail event can destroy it. Just like the rest of the markets.
All ETFs are rebalanced daily. That has not stopped the 500 or so that cease to exist today.
B/C of low demand?
Some of them are due to low demand but that low demand is a function of something right? Perhaps the ETF was NOT doing what it was suppose to do in which people will stop owning it and then yes, once it sits there with no volume it will be delisted.