For the first time ever, the Short-Term Volatility ETN (NYSEARCA:VXX) closed in the single digits, at an all-time low of $9.41 based on Friday's close. That's down 20% in the last month alone and down more than 50% in the last three months. The reason? A persistent contango in the market for volatility futures as the stock market has moved higher and higher. Here's a look at the volatility term structure since early March.
You can see that the contango has settled at very low levels. The colored lines show various VIX futures contracts. The dotted lines show contracts that have already expired. The dashed line at the bottom shows the VIX itself.
Here's another view of that chart with the VXX ETN price plotted below.
If the contango spreads narrow, this ETN could certainly rise, at least a bit. But unless we see major panic in the market for an extended period of time (say over a period of at least several weeks like in the summer of 2011), it's highly unlikely that VXX can make even a 100%+ move to the upside to take it into the 20s again.
That's because the VXX fund is engineered to steadily drop over time when volatility stays in contango. Yes, the ETN rises when volatility goes into backwardation. But once that backwardation disappears - and it always does - the fund just continues its relentless drop.
Here's a logarithmic chart showing the VXX ETN and its 97% drop since the fund was introduced in 2009.
Unless there's some problem with the structure of the exchange-traded notes themselves, VXX won't hit zero, but it's certainly destined to approach zero. That's not to say it can't rise quickly and sharply in a few days or maybe weeks during a severe market panic, but if it does, you can really only trade it for short time periods.
I'll bet we see a reverse split pretty soon. A one for four reverse split would take the ETN back into the high 30s. But in a couple of years or so (maybe even less), we'd probably see this fund back into the single digits again. That's just the way volatility works.
Once again, funds like VXX are suitable only for taking advantage of short-term volatility trends, not for holding over long time periods.