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Summary

  • ZIV has been mentioned by many of my followers and here is my response.
  • Since inception, ZIV has produced meaningful gains (during a bull market).
  • Other volatility ETPs have produced better opportunities.

When writing my articles on VIX Futures ETPs (products), I always take into account your feedback. Something that I hear over and over like a fly in my ear is, what about the VelocityShares Daily Inverse VIX Medium-Term ETN (NASDAQ:ZIV)?

The reason I do not include ZIV in my articles on Proshares Ulta VIX Short-Term Futures ETF (NYSEARCA:UVXY) and Proshares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY) is because we are talking about two dynamically different vehicles. Yes they both trade the VIX but, it would be like comparing apples to apples. The difference is one apple is red and the other is green. They are both apples, but produce different flavors.

Before we even get into talking about ZIV, my stated position is I like using UVXY and SVXY. That is what I am most comfortable with and trading with those vehicles has yielded me good results. You can view my UVXY options strategy under my SeekingAlpha Instablog. Please make sure to click "follow" while you are there (I really appreciate it).

Okay, here we go. Below is the historical chart for ZIV underlying index.

(click to enlarge)

Chart taken from ZIV prospectus.

I like this chart because it shows you how the ETN would have reacted through the recession on 2008 and market pullback of 2011. The take away from this chart should be that ZIV would have lost more than 99% of its value in 2008. I don't believe the fund would have ceased operations by dropping more than 80% in a single day.

Let's view how ZIV has performed, compared to UVXY and SVXY, since mid 2011.

I would ask anyone commenting on the SVXY article recommending ZIV, why? We previously discussed that SVXY yielded an 80% return last year and my return was 86% shorting UVXY with the options strategies listed on the Instablog. Last year ZIV yielded 54.6%.

I again question the level of complacency I hear long-term buy and hold champions of SVXY and ZIV. Not that I don't agree with their short-term buy and hold, with a stop loss, benefits.

Fundamentals of ZIV

(click to enlarge)

ZIV allocates funds between the fourth, fifth, sixth, and seventh month futures.

(click to enlarge)

Here is a visual of the funds cycle. Realistically each transaction is a buy/sell. However, I like the wording buy/transfer/sell on the visual chart.

Looking at the chart you can see that mid-term futures are currently in contango. Contango will be on your side most of the time with mid-term futures (just like front month futures). The real share price threat comes from a rise in all of the VIX futures. If you take a look at vixcentral.com, their website shows historical futures data. Looking at the 2008 chart below, mid-term futures were in backwardation for an extended period of time (it continued on long after the end data of this chart).

(click to enlarge)

Outlook: I would not recommend investing in a inverse (short) VIX product in this environment. The risks are too high with the VIX being at such low levels. Yes you have contango on your side, but do you really want to stay up all night worrying about a rouge event. I made three trades last year that yielded 86%. It get in, get out, and get on with life instead of obsessing about the daily movement of the VIX futures. Until we reach backwardation, I am not interesting in touching ZIV or SVXY no matter how high contango is.

Conclusion: ZIV and its mid-term futures philosophy offers an attractive yield in a rising market. SVXY has provided substantially better results due to the higher level of contango found in front to second month futures. ZIV, like the rest of VIX futures ETPs, requires a watchful eye on market events, VIX futures, and timing is very important.

At the end of the day ALL VIX futures ETPs are trading vehicles and not buy and hold investments. Each fund, regardless of past performance, has the ability to lose over 95% of its value.

I prefer my strategies in shorting UVXY and purchasing SVXY over buying ZIV.

Risk statement:

Here is a quote from ZIV prospectus that I feel is important for all of the non-believers of risk in this fund. I don't think you have to stay up all night worrying about ZIV dropping to zero but I always recommend a rolling stop loss just in case. Theoretically SVXY has a much higher chance of terminating than ZIV. Front month VIX futures move a lot more rapidly than mid-term futures.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: ZIV Versus The Volatility ETP Competition