So, why are volatility ETFs such poor performers, given THIS?

S

Saltynuts

Take a look at this article. Very insightful:

http://jonathankinlay.com/2016/07/developing-volatility-carry-strategy/

He tests shorting VXX, and buying and carrying the front-month VIX futures (which I would guess means carrying the earliest month until expiration, then buying the next one, and so on) to hedge.

The VIX futures go down far, far less than VXX, so the strategy, at least for the period he tested, is profitable.

Why the HECK is VXX so much more of a drag down than a long VXX future? The average expiration period had to be very similar, but VXX was a complete dog compared to VIX futures.

Thanks!
 
I get that (I think) DeltaRisk. They are always rolling their futures so they have a 30-day away averaged maturity date. But if this guy was carrying the next month's futures, waiting until they expire, and then moving on to the next one, it seems like his expiration would be 30 days or less. So, all in all, not that big a difference it seems. Whats more is that the two were not even close - VXX was a TOTAL DOG in comparison. We are not talking about a few percentage points or what not, it was a total wipe-out.

Thanks!
 
Saltynuts said:
I get that (I think) DeltaRisk. They are always rolling their futures so they have a 30-day away averaged maturity date. But if this guy was carrying the next month's futures, waiting until they expire, and then moving on to the next one, it seems like his expiration would be 30 days or less. So, all in all, not that big a difference it seems. Whats more is that the two were not even close - VXX was a TOTAL DOG in comparison. We are not talking about a few percentage points or what not, it was a total wipe-out.

Thanks!
More...

I’ll post what I can when I get free, little busy right now. Maverick74 would know better than me.

I don’t trade anything like that.
My bread and butter is physicals.
 
As a side question - in the article, he mentions that the last few days of the month VXX acutally generally outperforms, which he says is related to the way it works. Does anyone know what he is referring to? Thanks!
 
Does the writer of that article correctly incorporates trading fees? Since rolling VIX futures continuously means fees, and crossing b/a spread, will be a continuous drag, while having just the VXX on is a one time trade.
 
Hmmm, he mentions trading fees JackRab, but does not try and incorporate them into the analysis. Maybe that is the answer. VXX is incurring trading fees every single day when it rebalances, thus dragging on performance, whereas if you just by the nearest front VIX future, wait for it to expire, then buy the next one out, you are only incurring trading fees once a month.

Still, the magnitude of the difference between them is so great I can't believe that is the total answer.

Thanks!
 
Saltynuts said:
Hmmm, he mentions trading fees JackRab, but does not try and incorporate them into the analysis. Maybe that is the answer. VXX is incurring trading fees every single day when it rebalances, thus dragging on performance, whereas if you just by the nearest front VIX future, wait for it to expire, then buy the next one out, you are only incurring trading fees once a month.

Still, the magnitude of the difference between them is so great I can't believe that is the total answer.

Thanks!
More...

No.. it's the other way around really... if you would mimic VXX by trading the VIX futures, you would need to rebalance everyday. Not just once per month.

VXX is based on the 30-day vol, so to get the similar result you need to have thefirst 2 monthly futures in a way it creates 30-day vol. So with Future A expiry in 20 days and Future B expiry in 50 days... you would need 20/30 allocated to A and 10/30 to B. The next day that would be 19/30 A and 11/30 B. etc etc...

So maybe the writer didn't incorporate those fees of trading the futures daily so it seems that the futures strategy does better than the VXX
 
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