Inverse VIX Futures ETNs: Caveat Emptor

Abstract

This article examines the performance of 11 inverse volatility exchange-traded notes (ETNs) and 11 portfolios, consisting of an ETN and the S&P 500 Index, resulting in a total of 22 portfolios. Using risk-adjusted returns, actual wins versus expected wins, and two holding periods, the results establish that only the XXV consistently produces higher risk-adjusted returns than the S&P 500 regardless of the testing criteria. The SVXY also stands out as superior but underperforms the S&P 500 when the holding period is lengthened. The XIV is a strong performer relative to the S&P, but weaknesses are noted when the ranking criteria, holding period, or portfolio construction are altered. Finally, the benefits of portfolio diversification are found to be insufficient to outperform the S&P 500 for 10 of the 11 constructed portfolios. The pattern of the funds’ returns is such that it causes a reduction in, or even a reversal of, the benefits of portfolio diversification, regardless of the timeframe or ranking criteria applied.