Tracking VIX: long VIXY or short XIV?

J

jbperez

I found this Motley Fool article to be a very good explanation of why the VIXY is not tracking XIV very well at all ( http://goo.gl/KmLVY ):

http://www.fool.com/investing/general/2013/03/04/contango-1-key-reason-not-to-buy-these-etfs.aspx

My question now is will shorting XIV rather than going long VIXY work out better for tracking returns on the VIX?

Or would there be, in the case of a rising VIX, backwardation such that XIV downside will be reduced in such a scenario (e.g. messing up XIV's inverse tracking of an increasing VIX)?
 
A closely related question is that if the VIX stays _mostly unchanged_ at its current low level for a long period of time, will the XIV keep rising during that period (rather than staying put) ?


In other words, is backwardation in VIX futures the current norm when the VIX is staying low?



Looking at this chart -> http://goo.gl/x7eha <- however, seems to indicate the XIV does a much better job of inversely tracking the VIX compared to the VIXY and VXX's positive tracking.

So, as asked in the previous post, wouldn't going short the XIV be a much better way of tracking the VIX rather than buying VIXY or VXX?
 
Proshares does not offer an inverse counterpart to the VIXY. But since XIV inverse ^VIX is from Velocityshares, I realized Velocityshares must have a product that tracked the ^VIX long and this is VIIX. I was curious about its performance then and as it turns out:


http://goo.gl/cCqLM

the VIIX and VIXY are nearly 100% correlated, and thus, just as bad as at tracking ^VIX.
 
I have been wondering these things too, esp the one about whether XIV continually moves up under neutral VIX periods because of the inverse of futures rolling.
 
There was a pretty good article in Seeking Alpha this morning on this very subject.

It's fairly complicated, but basically, the author makes the point that XIV has enjoyed a period of remarkable outperformance that is unlikely to continue.

XIV is helped by VIX futures contango, since it is an inverse ETN and shorts futures. Conversely, futures backwardation, which can be expected on days like yesterday, causes it to lose more than expected.

The author points out that the sponsor of these ETNs warns in the prospectus that they are designed for day traders basically. The expected value of XIV over a long period is zero. It can lose a lot even if VIX stays steady over time if there is a lot of day to day volatility.
 
Keep in mind that none of these actually track spot VIX, they're tracking front month VX futures.

You can't actually statically replicate the VIX due to non-linearity.
 
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