Two exchange traded products with over $1 billion in assets are among the industry’s biggest destroyers of investor capital in recent years.
Few ETFs have caused wealth destruction on the scale of VXX, writes InvestorPlace contributor Daniel Putnam.
“Since its inception on Jan. 29, 2009, VXX has declined an astounding 96%. This year alone it’s down more than 57%,” he wrote. “But for some reason, investors just aren’t getting the message. VXX has logged an average daily trading volume of more than 51 million shares per day, which is more than all of the other 24 volatility ETFs combined.”
VXX is an exchange traded note designed to mimic the performance of futures contracts tied to the CBOE Volatility Index, or VIX. The benchmark is known as Wall Street’s fear index because it rises when investors are seeking protection in the options market. The VIX tends to have an inverse correlation with stocks.
Because it tracks VIX futures contracts, the ETN does not follow the spot price. [Caveat Emptor – Volatility ETFs]
“Because futures have a finite life, a fund must sell near-to expire contracts and replace them with contracts with later expiration dates. This practice is known as rolling contracts. When the prices of longer-dated futures contracts are above the current spot price of the commodity, the market is said to be in a state of contango,” Morningstar says in a profile of VXX.
“Under contango, this phenomenon creates what is known as a negative implied roll yield because rolling futures contracts would initially result in a loss,” the investment researcher added. The VIX futures curve generally remains in contango “so take heed before establishing a long-term long position here.”
VXX has a market cap of $1.7 billion, according to issuer Barclays.
UNG, the natural gas ETF, can also be hurt by contango because it invests in futures contracts. It has total assets of $1.1 billion.
The five-year total annualized returns for UNG were down 43.6% as of July 6, according to Morningstar. The ETF has been hammered with natural gas prices on a supply glut.
iPath S&P 500 VIX Short Term Futures ETN
U.S. Natural Gas Fund