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Leveraged VIX ETFs Tumble Over 95% This Year


Although they’re not designed as long-term investments, the performance of a pair of leveraged exchange traded products that invest in VIX futures contracts is shockingly bad in 2012.

VelocityShares Daily 2X VIX Short Term ETN (TVIX) and ProShares Ultra VIX Short-Term VIX Futures ETF (UVXY) were down 95.4% and 96% year to date, respectively, as of Sept. 27, according to Morningstar.

TVIX is an exchange traded note while UVXY is an exchange traded fund.

Some traders use them to hedge or speculate on market pullbacks since the CBOE Volatility Index, or VIX, typically rises when stocks fall.

“Volatility jumps in tandem with stock price crashes, spiking whenever the market collapses. Expected volatility, thus, serves as a proxy for market uncertainty, affording the VIX Index its common moniker of ‘The Fear Index,’” explains Morningstar analyst Abraham Bailin in a report on TVIX.

“Note that this offering is targeted at sophisticated investors looking to manage daily trading risks and was not designed to serve as a passive long-term core holding,” he adds. “The application of daily leverage on a fund held longer than one day can very quickly erode the holdings returns due to the pernicious effects of compounding arithmetic.”

TVIX and UVXY are geared to track short-term VIX futures contracts, rather than the spot price.

Volatility-linked ETFs have been hammered by a falling VIX and “contango” in the futures market which causes them to lose money when they roll the contracts. [‘Bull Market in Fear’ — Investors Buy VIX ETFs Despite Price Decline]

Earlier this month, UVXY initiated a 1-for-10 reverse split. [Get Ready for UVXY Reverse Split]

Despite their steep pullbacks, investors have added money to UVXY and TVIX in the third quarter – they have inflows of $184.7 million and $84.7 million, respectively, according to IndexUniverse.

VelocityShares Daily 2X VIX Short Term ETN

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.