Worst ETN Ever

• Posted by Adam Warner
• on December 17th, 2009

OK, maybe this isn’t the worst ETN ever, but it’s pretty pathetic.

Yes, we’re talking VXX, the ETN that tracks a perpetual 30 day future in the VIX. It’s a perfect storm of awful for this thing. It came into existence in late January, about 6 weeks before the market bottomed and the VIX started an inexorable march lower.

Adding to the misery we have the structure. To maintain it’s 30 day duration, VXX presumably must roll some futures, or futures-equivalent swap, each day. If it’s a future, it would generally need to buy the 2nd cycle out and sell the nearer one. And as we know, VIX futures have traded in an almost permanent contango. So the ETN will need to pay a premium each an every time.

The only reason it hasn’t gotten plowed even worse is that the futures roughly a month out have at least maintained the premium, so the pain is in the relatively small bad roll as opposed to a relatively large decrease in the underlying. But that may be changing too. Jan. futures premium has gone from $5 to close to $3.5 this week which makes some sense in that the premium is too high. What doesn’t make sense is the timing. The premium usually contracts when the VIX itself lifts, but that’s clearly not the case this week. It’s the futures getting slammed.

Anytime I post this pup, someone asks if I’m a buyer. I mean it has to be a bottom, right?

My answer would always be that it’s looked like a bottom many times along the way. I mean the RSI(2) is under 1 right now, so that’s certainly a start, but I’d like to see the futures premium lower. That being said though, I’ve never traded it.

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