There are millions of shares traded with the VXX ETF and billions outstanding as investors have poured into this market as a "hedge" against equity price shocks. The ETF is supposed to follow the CBOE VIXX index, but it is actually an index of the front two VIXX futures contracts. As an index of the two futures contracts, if the futures price slope is downward (contango), the market will lose value as the component futures contracts of the index move closer to maturity. If the market is in backwardation, (upward sloped to the cash index), the index will gain in value as the futures approach the contract expiration.
For those who have bought it and stuck it away in a portfolio, it has been a continual performance drain. I will not go into the many reasons for why this is the case other than to highlight the declining volatility since the Great Financial Crisis and the main contributor, the VIXX futures contango effect.
Most of this is known, but the impact is especially highlighted when there is a reverse split that offsets the significant price decline from the relentless loses from the futures contango.
VIXX futures has many uses and is a very interesting trading vehicle, but it is not a buy and hold hedge instrument. Investors should focus on the the purpose of holding the VXX as an investment in the first place. The main reason is to serve as an uncorrelated or negatively correlated asset relative to equities. In a case of a volatility spike, the VXX will gain while equities should decline as the market falls to give new investors compensation for holding a riskier asset. However, the index construction creates a performance drag, a time decay, if there is no volatility spike. The cost of this hedge is too high for a passive investor.
VIXX futures has many uses and is a very interesting trading vehicle, but it is not a buy and hold hedge instrument. Investors should focus on the the purpose of holding the VXX as an investment in the first place. The main reason is to serve as an uncorrelated or negatively correlated asset relative to equities. In a case of a volatility spike, the VXX will gain while equities should decline as the market falls to give new investors compensation for holding a riskier asset. However, the index construction creates a performance drag, a time decay, if there is no volatility spike. The cost of this hedge is too high for a passive investor.
If the objective of holding this investment is hedge diversification, there are other alternatives like bonds as a safe asset or managed futures which do not have the drag from VIXX futures contango. Granted the link between these alternatives may be different, but the portfolio effect will be similar without the performance drag.
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