A few articles published on Seeking Alpha have focused on comparing two volatility ETNs: VelocityShares Daily Inverse VIX Short-Term ETN (NASDAQ:XIV), and VelocityShares Daily Inverse VIX Medium-Term ETN (NASDAQ:ZIV). Because the most recent of these appeared in July 2015, all of them predated the past six months of elevated market volatility.
This article focuses on the historical performances of XIV and ZIV since inception, and assesses their suitability for trading and/or investing in light of additional wisdom gained over the past six months.
XIV is an inverse ETN, based on short-term VIX futures. Its reference index balances a collection of front month and second month futures, which are rebalanced daily so that the average expiration date of the basket is maintained at a constant duration of one month. Details of how its tracking index works can be found at this link. ZIV is also an inverse ETN, but is based on medium-term VIX futures. Its reference index basket contains futures from the fourth month through the seventh month. The prospectuses of both ETNs are posted on the VelocityShares website.
Historical closing prices for XIV, ZIV, and VIX were downloaded from Yahoo! Finance. Data used for this article ran from 11/30/2010 (the inception date of both ETNs) through 1/25/16, inclusive.
The following figure shows how an initial investment of $10K would have fared if purchased at market close on 11/30/10 and held the entire time. The red curve represents an investment in XIV, and the black curve represents ZIV. It should be obvious that the price action of XIV is more volatile, both to the upside and to the downside. Leading up to the most recent round of volatility (starting mid-August 2015), XIV was outperforming ZIV. The outcomes have reversed since then.
Direct Comparisons between XIV and ZIV
A number of direct comparisons are collected in the following table. Evaluated over the entire time frame, the CAGR of ZIV is 22.86% vs. 13.74% for XIV. CAGR values depend on the start and end dates. The comparison would have been much different for a calculation whose end date was mid-August of 2015.
On a day-to-day basis, daily price changes in ZIV correlate to daily price changes in the spot VIX, with a beta of -0.185. The corresponding beta value for XIV is -0.461. These ETNs are not designed to track changes in the spot VIX. Nevertheless, beta indicates that, on a typical day, the percent change in XIV price is expected to be only 46% of the percent change in VIX, and in the opposite direction. The expected change in ZIV is even smaller, at about 40% of the change in XIV. The daily volatility of XIV prices is substantially higher than that of ZIV prices. This is largely due to the fact that front-month futures are much more responsive to changes in spot VIX than are medium-term futures.
Based on the full dataset, the risk/reward statistics clearly favor ZIV over XIV. These statistics include a larger Sharpe ratio (0.852 vs. 0.640), a larger RoMaD (0.875 vs. 0.622) and a larger MAR ratio (0.553 vs. 0.185). Additional information on these and other commonly used ratios can be found on websites like Investopedia.
The price action of XIV is significantly more volatile than that of ZIV, largely because front-month futures respond to changes in spot VIX much more rapidly than do medium-term futures. This makes XIV the choice for day-traders, and for others who understand the importance of monitoring their position carefully, at least once a day. If one can guess the direction of volatility correctly, XIV offers the potential of higher rewards.
What is not clear is how XIV and ZIV price action will compare over very long periods. The trend in the graph appears to be that XIV frequently crosses above and then below the ZIV graph, but the two never permanently separate. Will the two continue to track in this same fashion over very long time frames? If so (and we don't know the answer), it could be that the long-term price destination of XIV, though much more volatile, will not be significantly different from that of ZIV.
For now, I will assume that the long-term trends will ultimately lead both ETNs to essentially the same place. If that assumption turns out to be correct, its decreased volatility and its superior risk/reward statistics strongly favor ZIV as an equally profitable, but safer long-term investment.
Based on these findings, here is what I will be doing in the near future. (1) For "mad-money" trading purposes, I intend to buy ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY) and will (mostly) follow my own strategy. The similarities and differences between XIV and SVXY are outlined in this linked article. (2) As part of my "safe" retirement money, I intend to set aside a fraction of the account for investing in ZIV.
The ideas expressed in this article are for informational purposes only. Volatility-related ETPs carry a high level of investment risk. Please be sure that you know, and are willing to accept the risks before making any trades. Good luck to all!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.