The VXUP and VXDN volatility ETFs were introduced last month by AccuShares as a more “pure” directional trade on the VIX than VXX and /VX futures. You know I love volatility, and since VXUP and VXDN are the brainchild of my old derivatives professor at the University of Chicago, Robert Whaley, I had particular interest in them.
You can watch the tastytrade LIVE! shows I did on May 20 and May 21 for the details of how these ETFs work in theory, but because the proof of the pudding is in the taste, I figured I’d buy 100 shares of VXUP to see how they work in practice. On 5/21/15, I bought 100 shares of VXUP for $28.35 and also bought 1 /VXM5 future for $14.40. Then I evaluated the trades based on yesterday’s closing prices of VXUP at $28.58 and /VXM5 at $14.85.
During that time, the VIX was up 18% from 12.25 to 14.47, but VXUP was up only .8%. I know that VXUP and VXDN are supposed to measure VIX monthly performance from one “distribution date” to the next, but traders don’t trade according to someone else’s timeframe.
18% to .8% tracking error is too big to make VXUP an effective trading product. By comparison, /VXM5 was up 3%. That didn’t track VIX that closely either, but I don’t expect it to. For p/l, the 100 shares of VXUP are up $23. The /VXM5 is up $450, but it’s worth $1,000 per point. Adjusting for contract size, 1000 shares of VXUP would have made $230, which is only 51% of what the /VX future made. Also, VXUP and VXDN don’t offer any options, which limits the flexibility of trading strategies.
From a liquidity standpoint, VXUP and VXDN stink, with VXUP’s daily volume in the low 5 figures and VXDN in the low 4 figures at best. Bid/ask spreads have stayed wide, around .60.
So, I’d give VXUP and VXDN 3 stars for ingenuity. Whaley and Accushares came up with a theoretical approach for a product to more closely track the VIX, and that’s great, but VXUP and VXDN are hard to understand from a retail perspective and have constraints on their price behavior that make them less useful to a volatility speculator or hedger.
I give VXUP and VXDN 1 star for trading. I don’t care that I’m up a couple hundred bucks on the trade. VXUP didn’t behave like I think it should and they are not liquid. /VX futures gave me a better p/l and have much better liquidity.
Bottom line: I won’t be trading VXUP or VXDN until I can find a way to take advantage of their deficiencies.
What do you think of VXUP and VXDN? Leave your comments and/or questions below!