The Rise of the VIX ETP

Feb 4, 2014

By Catherine Clay – Livevol, CEO

As the VIX heads toward the 20 mark, it is fitting to wish a Happy Birthday to two VIX ETPs: VXX and VXZ. These five-year-old volatility products made their debut in January 2009, and have generated a tremendous amount of investor attention and interest.

As most JLN readers know, the VXX and VXZ provide exposure to equity market volatility through the CBOE VIX futures. VXX offers volatility exposure to a daily rolling long position in the first- and second-month VIX futures, while the VXZ focuses on the mid-term futures contracts.
 
Since the introduction of these two straightforward products, additional VIX ETPs have been launched to provide exposure to various other aspects of volatility. Some of the more recent products, for example, seek to capture multi-legged strategies with both long and short components. These multi-legged VIX ETPs include products that dynamically allocate a long volatility position to a long S&P 500 position (such as PHDG and VQT), hold a small position of VIX out-of-the-money calls (VIXH), and have either a fixed (XVIX) or variable (XVZ) short-term leg balanced against a long mid-term leg.

All the innovation in the VIX and VIX derivative space has me turning to Bill Luby, who writes a fantastic blog on the subject (vixandmore.blogspot.com).

“Only two VIX ETPs were launched in 2012 and only two last year,” Bill informed me. “This suggests that the product landscape may be stabilizing.”

On the other hand, Bill also sees a number of areas ripe for innovation and potential broad market acceptance of new products.

“I will be closely watching the product platform associated with the VXST, where the CBOE is set to launch futures on February 13,” he said. “Given that the VXST is more sensitive to volatility than the VIX, the full product platform—including potential ETPs—is likely to generate a good deal of interest with short-term traders.”

With market volatility on the rise, the timing of the new VXST products seems impeccable. All the VIX ETPs and their respective configurations can leave some scratching their heads. But, as the VIX continues to rise, more investors will be motivated to learn which volatility products are available to them. Fortunately, Bill Luby and other educators like him have plenty of information to offer.

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