A date with the devil: peeking at VIX related ETFs and ETNs
Lets talk about a couple of those amazing, decaying, spiking, then decaying once again messes that are VIX related ETFs and ETNs. It seems like every other article on seeking alpha has some hedge-fund-manager-wannabe recommending that people buy them. Guys on Real Money Silver are long them. Famous bloggers talk about them, they are considered by so, so many to be an "intelligent hedge". After last summers fireworks, VXX has gained asort of following that just doesn't go away. TVIX is like double-leveraged VXX, and I have seen this recommended here and there also.
The only downside to these things is that they can decay (and a state of decay is their "normal" condition) through contango (like many other ETFs and ETNs). If anybody doesn't understand contango and how it can affect ETFs and ETNs, please ask and I will explain. I have seen some decent explanations of why this happens on the web, but never a thoroughly excellent one. But I digress.
This decay creates a situation where if you are "wrong", you lose money, if you hold for a very very long time you are all but sure to lose money, and where good timing (or extreme events) are needed to make money. t is difficult to make money going long these things.
But, as I frequently short these broken ETFs because I hate them, and because it can be a nice way to make money, and as I have suggested to others including you folks that this may be an advantageous strategy... And because a couple of friends have taken it to some kind of braindead extreme (and won, recently), I thought it would be necessary to take a look at the downside to short-selling these things.
In essence, I will show that bets long or short these types of securities are essentially bets on or against abnormal market conditions. To short sell VXX is quite literally to bet against a "black swan". To go long it is, more or less, a bet that one will occur. Unless you are focused on very short timeframes.
Pro's of positions in these ETFs:
-going long - some of the most potent protection you can find against truly dramatic market drops, against "black swans".
-going short - you have a substantial "tailwind" in the decay in many market conditions, nay in most market conditions
Con's of positions in these kind of securities:
-going long - you're running uphill and with the wind, over any type of long period of time you almost literally need to have a truly dramatic market event to win
-going short - being short these things is one of the least "black swan proof" things you could possibly do. If things get really ugly, this will be really a bad position to be holding.
In the next post i'll pony up some graphs of historical (including pre-lehman brothers) performance of these things. For some reason I can't post pictures in my initial post, only in replies.