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The VXX is an Exchange Traded Note (ETN) that tracks the VIX short-term futures. To be more specific, the VXX is a portfolio composed of the front two-month /VX (VIX) futures that bear continuously changing weights. VXX is just one of the available volatility products, and it is important to note that it does not always perform like the other products might (such as the VIX).
One of the most frequent opportunities the VXX has to outperform the VIX is when we are in backwardation, which is when the front month future is worth more than the back month future.
While there are certain strategies that may be successful using the VXX, our studies show that there are more efficient volatility products to trade in most scenarios. With that said, it is still very important to understand the relationship of each volatility product so you have the knowledge you need to create a strategy that is best suited for you.
| VIX | VXX | |
|---|---|---|
Name: | Chicago Board Options Exchange's CBOE Volatility Index | Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN |
Underlying Index: | S&P 500 Volatility Index | S&P 500 VIX Short-Term Futures Index Total Return |
Structure: | Index | ETN (Exchange-traded note) |
Tradeable Underlying: | No. As VIX is an index, you can not directly trade VIX. You can, however, trade options and futures based on the VIX. | Yes. VXX is an exchange-traded note (ETN). ETNs can be traded just like stocks. |
Options Style: | European. VIX options are European style, and can therefore only be exercised at expiration. *No early assignment risk | American. VXX options are American style, and can therefore be exercised at any time. *High early assignment risk |
Options Settlement Type: | Cash-Settled. VIX options are settled via a simple exchange of cash that represents how much an option in-the-money by. | Physical-Delivery. VXX options are settled via an exchange of stock. One standardized options contract represents 100 shares of the underlying stock. |
Time Decay Effect: | Zero. VIX uses S&P 500 index options, not futures (like VXX) as its base. Therefore, VIX does not experience time decay via contango. | High. The rolling of the VIX futures required to keep VXX alive causes VXX to experience profound time decay. Most traders prefer to sell VXX for this reason. *VXX is not a long-term investment. |
Leverage: | 1X | 1X |
Liquidity: | Very High. The VIX index is very popular amongst traders. For this reason, VIX options liquidity is very high. | High. VXX has slightly lower liquidity than VIX, but it is still a very liquid product for both the ETN and options. |
Options Taxation: | Eligible for Section 1256: Gains and losses on index options are entitled to a tax rate equal to 60% long-term and 40% short-term capital gain or loss. | Eligible for Section 1256: Gains and losses on non-equity options (like VXX) are entitled to a tax rate equal to 60% long-term and 40% short-term capital gain or loss. |
The VXX works by giving investors exposure to the S&P 500 VIX Short-Term Futures Index. VXX achieves this by combining two VIX futures products: one future is always the front-month expiration cycle, while the second is the next-month expiration cycle.
The goal of VXX is to provide a product that tracks the percentage change of a 30-day VIX futures contract. Since a constant 30-day VIX future does not exist, two futures must be combined to reach this 30-day average.
Though both VXX and VIX track volatility, they are two entirely different products.
VXX is an exchange-traded note (ETN) based on VIX futures. Because these futures need to be rolled to keep VXX alive, this ETN experiences profound time decay via ‘contango’. VXX vastly underperforms the VIX for this reason.
VIX is an index composed of S&P 500 options so does not, therefore, experience contango.
Additionally, you can trade shares of VXX, but VIX does not offer an underlying tradeable security.
The best time to trade volatility indices is typically the market open and close. During these times, a disproportionately large amount of buying and selling occurs in the stock market, which typically elevates volatility.
Additionally, the best time to trade volatility indices includes before and after major economic events, such as the release of unemployment data or inflation reports.
VXX is an ETN. ETNs can not go negative in value. If you are buying VXX outright, the most you can lose is the amount you paid for the exchange-traded note.
VXX can prove to be a good short-term hedge. Because of contango, VXX sheds value persistently. The prospectus for VXX issued by Barclays states, ETNs are only suitable for a very short investment horizon.
Barclays suspended the issuance of VXX on April 28, 2022, after the company sold more ETNs than it was legally permitted to. It was later permitted to issue more VXX.
You can still buy VXX. On May 23, 2022, Barclays filed a shelf registration with the SEC which will allow the firm to issue VXX once more.
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