On the morning of Friday, July 13, a reader sent me a question ask how low the iPath Short-Term VIX ETN (VXX) could trade, noting that "I have always believed that there is a downside limit for the VXX."
My reply was that there is no downside limit on how low this ETN can trade. And wouldn't you know it? By the end of that same trading day, VXX closed at a fresh, new all-time low of 13.35.
I think part of the reason why some believe VXX has a built-in lower limit is rooted in the idea that the VIX itself has a lower limit of sorts. The VIX rarely, if ever, trades below 10%. As long as the market has a pulse and there are options to trade, there will be a VIX moving up and down along with the market.
But VXX is a different animal. It tracks buying short-term contracts on VIX futures, then selling and rolling them over on a continuous basis. Sometimes this strategy makes money -- a lot of money in the right circumstances -- but only in the short term, over a period of a few days or weeks. Most of the time this strategy is a loser.
Given a persistent contango, which is the natural state of the VIX futures market, and the fact that VXX represents the indexed returns on this strategy, there's no reason why VXX can't trade as low as a penny -- or even the smallest fraction of a penny -- at least in theory. In fact, VXX is already pushing into penny stock territory compared to where it began its life when you view it in adjusted terms.
VXX Really Trading at $3.34?
This ETF was launched at $100 back in 2009. In fact, on a nominal basis it traded at $11.01 back in November 2010 before it was reverse split. That 1-for-4 split brought the price back into the $40s again. If there hadn't been a reverse split back in 2010, then VXX would now be trading at $3.34.
There's no reason the ETN couldn't be reverse split again. And again. And again.
The sponsors of the fund could reverse split the fund 1-for-10 tomorrow, bringing the price to $133.50, and I'd bet that within three or four years, VXX will be back at $13.35 and we'd be having this discussion yet again.
So, yes, there's a practical limit on how low VXX can go in nominal terms because I'm sure the iPath folks want to keep the price at a tradable level. Sure, VXX could move up sharply in the midst of a market panic. That's why people buy it, after all. But smart traders don't hold long VXX positions for very long. It's a tactical trade, not a long-term hold. That's because over the long haul in adjusted terms, VXX will continue to approach zero. As long as volatility generally remains in contango, you can pretty much count on it.