The low price of the VIX volatility index of S & P 500 is showing us calm and confidence in the markets. Until when? Nobody knows, but it seems likely that sooner or later return to see levels of fear, given the heights reached by the market without a consistent economic recovery back.
In these circumstances, a valid strategy to attempt to exploit the fear that future increases would buy volatility. You can buy volatility on the S & P 500 by buying options, futures on the VIX, or through ETFs.
For the investor not very active, which is not common trader or are familiar with the options and futures, the easiest way to buy volatility would be through an ETF. It saves so the cumbersome rollover of futures positions in the medium term.
There are two exchange-traded funds from Barclays to buy volatility: VXX and VXZ. The first warning that I do is that it is not actually traded funds (ETFs), but notes companies (TNCs). Most investors are not fixed in that detail, and has its importance. An ETF is an ETF with a separate legal entity, and the bankruptcy of the issuer or manager does not mean the bankruptcy of the fund. In contrast, TNCs are notes an issuer, and its value depends directly on the creditworthiness of the issuer. To see if it will be to buy a product to bet on fear, and fear at the end we will pass us.
Both products have a fee of less than 1%. The difference is that VXX VIX futures portfolio has one and two months while VXZ portfolio consists of four futures, five, six and seven months of expiration. I should also mention that VXX is much more liquid than VXZ.
The following graph we see the composition of the portfolios and VXZ VXX, respectively.
"They replicate these TNCs VIX behavior? No. They replicate the behavior of the VIX futures are held, which is not exactly the same. As happened to the oil ETFs on whether the future following maturities are more expensive than the closest maturity, when the TNC has to make the rollover will lose money, since you'll pay more dearly for the future following expiration regarding the price at which the future must sell immediately due. This also would suffer harm us if we have a position in futures on VIX and we want to maintain the medium term. Subsequent deadlines are simply more expensive because the market believes as we do, the VIX is rising, and betting on later periods and are higher. The same thing happened when oil traded at $ 40 and some months ahead futures trading at much higher prices, anticipating higher prices.
the chart below 6 months of the VIX with two TNCs. It clearly appreciate the price distortion caused by the different maturities of the futures portfolio.
see how the behavior of TNCs VXX has been much worse than the VIX, which itself has been bad. It has been because in each maturity, VXX manager had to pay more for the future of the next month as the market bet on rising volatility, although this has not happened so far.
Instead VXZ, the futures portfolio have different maturities and all of them more distant, not only did not suffer this effect, but has performed better than the VIX, because the more distant maturities VIX futures have down unless the VIX itself.
If increased fear what we expect in the short term, the effect of the rollover will not affect us and we will be able to benefit fully from the movement of the VIX. In this case it would VXX the TNC to use.
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