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Dissecting the tracking performance of regular and leveraged VIX ETPs

Author

Listed:
  • Hongfei Tang

    (Seton Hall University)

  • Xiaoqing Eleanor Xu

    (Seton Hall University)

Abstract

VIX exchange-traded products (ETPs) provide tracking on the return of a constant-maturity VIX futures index, instead of the uninvestable VIX spot index. In this paper, we develop a comprehensive framework to dissect the tracking performance of regular and leveraged VIX ETPs. In this framework, naïve investors in VIX ETPs expect to achieve the ETP’s leverage ratio multiplied by the VIX return during their holding period, but the actual ETP return can deviate dramatically from this naïve expected return due to four components of return deviation. The index substitution deviation is shown to be the primary driver of the bull (inverse) VIX ETPs’ return erosion (enhancement), which can be explained by the negative roll-yield as a result of the contango term structure of underlying VIX futures index. For leveraged VIX ETPs over multiple holding days, the compounding deviation due to the “constant-leverage trap” can be sizable. In addition, the NAV deviation due to expense ratio and fund management issues is negative, and the inefficiency deviation doesn’t accumulate over long holding periods due to the creation/redemption feature. Our return deviation framework can be generalized to other ETPs tracking indices that are either uninvestable or unrealistic to replicate.

Suggested Citation

  • Hongfei Tang & Xiaoqing Eleanor Xu, 2019. "Dissecting the tracking performance of regular and leveraged VIX ETPs," Review of Derivatives Research, Springer, vol. 22(2), pages 261-327, July.
    • Handle: RePEc:kap:revdev:v:22:y:2019:i:2:d:10.1007_s11147-018-9149-7
    DOI: 10.1007/s11147-018-9149-7
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    References listed on IDEAS

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    1. Gurdip Bakshi & Nikunj Kapadia, 2003. "Delta-Hedged Gains and the Negative Market Volatility Risk Premium," The Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 527-566.
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    Cited by:

    1. James S. Doran, 2020. "Volatility as an asset class: Holding VIX in a portfolio," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 841-859, June.

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    More about this item

    Keywords

    Leveraged ETPs; VIX; Futures term structure; Compounding effect; Tracking performance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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