VXX – iPath® S&P 500 VIX Short-Term FuturesTM ETN

The VXX date of inception goes back to Jan. 29, 2009 and here is its prospectus:

VXX iPath prospectus

  • The iPath S&P 500 VIX Short-Term Futures ETN tracks an index with exposure to futures contracts on the CBOE Volatility Index with average 1-month maturity. Exposure resets daily.
  • VXX is among the largest and most liquid volatility ETPs, and is one of a handful that offer short-term VIX futures exposure.
  • VXX is technically an exchange-traded note (ETN), which is similar to an ETF in that it trades on an exchange like a stock. However, ETNs are debt instruments, and do not have stocks or bonds as underlying assets. Therefore there is a risk of default VXX and other ETNs.

Two immediate caveats:

1) volatility ETPs deliver poor long-term exposure to the VIX index;
2) volatility ETPs have a history of erasing vast sums of investor capital over holdings periods as short as a few months.

Still, short-term VIX ETPs like VXX generally make better tools for tactical exposure to the VIX than midterm products (short-term means 1-month average term VIX futures).
They also tend to do a better job than midterm ETPs in matching the VIX statistically, but also lose more money from contango in their futures positions.
VXX’s performance is basically indistinguishable from its short-term peer ETPs but its excellent trading volume makes it the trader’s choice.
As an ETN, VXX is backed by Barclay’s credit rather than by assets.

VXX began trading on January 30, 2009 and will end trading on 30 Jan 2019 (VXX). As VXX is a big money maker for Barclay’s bank, they should set a new exchange traded note as we approach 2019.

How does VXX trade?

  • For the most part VXX trades like a stock. It can be bought, sold, or sold short anytime the market is open, including pre-market and after-market time periods.
  • With an average daily volume of 75 million shares its liquidity is excellent and the bid/ask spreads are a penny.
  • It has a very active set of options available, with five weeks’ worth of Weeklys and close to the money strikes every 0.5 points.
  • Like a stock, VXX’s shares can be split or reverse split — 4:1 reverse-splits are the norm and can occur once VXX closes below $25.

VXX can be traded in most IRAs / Roth IRAs, although your broker will likely require you to electronically sign a waiver that documents the various risks with this security. Remember that shorting of any security is not allowed in an IRA.

How is VXX’s value established?

  • Unlike stocks, owning VXX does not give you a share of a corporation. There are no sales, no quarterly reports, no profit/loss, no PE ratio, and no prospect of ever getting dividends.
    Forget about doing fundamental style analysis on VXX.
  • The value of VXX is set by the market, but it’s closely tied to the current value of an index (S&P VIX Short-Term Futurestm) that manages a hypothetical portfolio of the two nearest to expiration VIX futures contracts. Every day the index specifies a new mix of VIX futures in that portfolio.
  • The index is maintained by the S&P Dow Jones Indices and the theoretical value of VXX if it were perfectly tracking the index is published every 15 seconds as the “intraday indicative” (IV) value. Yahoo Finance publishes this quote using the ^VXX-IV ticker.
  • Wholesalers called “Authorized Participants” (APs) will at times intervene in the market if the trading value of VXX diverges too much from the IV value.
    If VXX is trading enough below the index they start buying large blocks of VXX—which tends to drive the price up, and if it’s trading above they will short VXX.
    The APs have an agreement with Barclays that allows them to do these restorative maneuvers at a profit, so they are highly motivated to keep VXX’s tracking in good shape.

How does Barclays make money on VXX?

  • Barclays collects a daily investor fee on VXX’s assets—on an annualized basis it adds up to 0.89% per year.
    With current assets at $1.15 billion this fee totals around $10 million per year. That’s certainly enough to cover Barclays’ VXX costs and be profitable. But even if it was all profit it would be a tiny 0.1% percent of Barclays’ overall net income — which was $10.5 billion in 2012.
  • From a public relations standpoint VXX is a disaster. It’s frequently vilified by industry analysts and resides on multiple Worst ETF Ever lists.
    You’d think Barclays would terminate a headache like this or let it fade away, but they haven’t done that even though 3 reverse splits — which suggests that Barclays is making more than $10 million a year with the fund.
  • Unlike an Exchange Trade Fund (ETF), VXX’s Exchange Traded Note structure does not require Barclays to specify what they are doing with the cash it receives for creating shares. The note is carried as senior debt on Barclays’ balance sheet but they don’t pay out any interest on this debt. Instead they promise to redeem shares that the APs return to them based on the value of VXX’s index—an index that’s headed for zero.
  • If Barclays wanted to fully hedge their liabilities they could hold VIX futures in the amounts specified by the index, but they almost certainly don’t because there are cheaper ways (e.g., swaps) to accomplish that hedge.
    If fact it seems likely Barclays might assume some risk and not fully hedge their VXX position. According to ETF.com’s ETF Fund Flows tool, VXX’s net inflows have been $5.99 billion since inception in 2009—and it currently holds $1.15 billion.
    So $4.8 billion dollars has been lost by investors and an equivalent amount by Barclays if they were hedged at 100%.
    If they were hedged at say 90% they would have cleared a cool $480 million over the last 4 years in addition to their investor fees.
    Barclay’s affection for VXX might be understandable after all.

YEARLY PERFORMANCE
Over the past five years, 2011 to 2015, VXX has lost almost 100% of its value. On Jan. 3, 2011, the adjusted closing price for VXX was $583.84.
On December 31, 2015, the adjusted closing price was $20.10. Therefore, if an investor bought VXX at the beginning of 2011 and held onto that investment until the end of 2015, they would have lost 96.56% of the investment’s value. It is evident that VXX is not a buy and-hold type of investment.
It is created for short-term trading to hedge or speculate on short-term stock market volatility.

MONTHLY PERFORMANCE
In the previous five years, from 2011 to 2015, the average monthly return was either zero or negative for 11 out of the 12 months.
The month with the worst return was September, with a -12.66% average monthly return. Right behind September were January and February, with -10.50% and -12.18% returns, respectively. Only one month, August, had a significantly positive average monthly return.
On average, the monthly return in August was 24.14%.

DAILY PERFORMANCE
For the five-year period from 2011 to 2015, the maximum daily return was 20% on Aug. 18, 2011, and the minimum daily return was -13% on Oct. 27, 2011.
The number of days in which the daily return was greater than 10%, from 2011 to 2015, was 26 days. The number of days in which the daily return was less than -10%, from 2011 to 2015, was 11 days. Therefore, even though there are more negative days on average than positive ones, the positive-return days are larger in magnitude than negative-return days. In other words, VXX can provide a meaningful hedge over one- or two-day periods. This is the attraction for investing in VXX.
However, it can be hard to catch those days. The number of days of negative returns is approximately 57% of the trading days from 2011 to 2015.

“VXX is a dangerous chimeric creature; it’s structured like a bond, trades like a stock, follows VIX futures, and decays like an option. Handle with care.”       (Six Figure Investing)

Start to trade it with The Summit trading system!

You can read this article on VXX split procedure too.

Here is a good article from Davix Easter on:

Why VXX loses value over time

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