Dissecting the tracking performance of regular and leveraged VIX ETPs

Hongfei Tang () and Xiaoqing Eleanor Xu ()
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Hongfei Tang: Seton Hall University
Xiaoqing Eleanor Xu: Seton Hall University

Review of Derivatives Research, 2019, vol. 22, issue 2, No 2, 327 pages

Abstract: Abstract VIX exchange-traded products (ETPs) provide tracking on the return of a constant-maturity VIX futures index, instead of the uninvestable VIX spot index. In this paper, we develop a comprehensive framework to dissect the tracking performance of regular and leveraged VIX ETPs. In this framework, naïve investors in VIX ETPs expect to achieve the ETP’s leverage ratio multiplied by the VIX return during their holding period, but the actual ETP return can deviate dramatically from this naïve expected return due to four components of return deviation. The index substitution deviation is shown to be the primary driver of the bull (inverse) VIX ETPs’ return erosion (enhancement), which can be explained by the negative roll-yield as a result of the contango term structure of underlying VIX futures index. For leveraged VIX ETPs over multiple holding days, the compounding deviation due to the “constant-leverage trap” can be sizable. In addition, the NAV deviation due to expense ratio and fund management issues is negative, and the inefficiency deviation doesn’t accumulate over long holding periods due to the creation/redemption feature. Our return deviation framework can be generalized to other ETPs tracking indices that are either uninvestable or unrealistic to replicate.

Keywords: Leveraged ETPs; VIX; Futures term structure; Compounding effect; Tracking performance (search for similar items in EconPapers)
JEL-codes: G11 G13 G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11147-018-9149-7

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