ETF Analysis: The iPath S&P 500 VIX Futures

The iPath S&P 500 VIX Short-Term Futures (VXX) is an exchange-traded note (ETN) designed to provide investors with exposure to equity market volatility. Shares of an ETN, which is structured as a debt instrument, can be bought and sold like shares of stock.

During times of high volatility in the stock market, the value of VXX shares will typically increase. On the other hand, quiet periods for the market will likely keep shares trending lower. Here's why.

Understanding VXX

The iPath S&P 500 VIX Short-Term Futures ETN is legally structured as an exchange-traded note (ETN), which is similar in nature to an exchange-traded fund (ETF). The main difference between an ETF and an ETN is that, while the exchange-traded fund represents ownership in a basket of securities—stocks, bonds, or commodities—within the fund's portfolio, the exchange-traded note is an uncollateralized debt instrument and has bond-like characteristics: investors can hold shares until maturity (which is Jan. 23, 2048, for the VXX ETN launched Jan. 19, 2018) and buy and sell before maturity.

Key Takeaways

  • The iPath S&P 500 VIX Short-Term Futures ETN is an investment security that provides exposure to the volatility of the U.S. stock market.
  • An ETN is like an ETF, but rather than holding a basket of stocks, bonds, or commodities, the exchange-traded note is a debt instrument with a maturity date.
  • VXX is designed to track the value of futures contracts on Cboe Volatility Index, which is a gauge of current volatility that is priced into S&P 500 index options.
  • VXX continuously rolls VIX futures contracts at each expiration, which can detract from performance.
  • VXX shares will typically increase in value when market volatility increases, but trend lower when volatility is muted.

Managed by Barclays Capital Incorporated, the iPath S&P 500 VIX Short-Term Futures ETN is linked to the daily price changes in Cboe Volatility Index, but in a complicated way. VIX is sometimes called the market's "fear gauge" because it tends to rise during periods of market uncertainty and spike in times of panic. The index tracks changes in the expected volatility priced into S&P 500 Index options and is computed using an options-pricing formula.

Futures contracts are listed on Cboe Volatility Index, and VXX is an ETN that tracks the S&P 500 VIX Short-Term Futures Total Return Index, which is designed to offer exposure to long positions in Cboe Volatility Index futures contracts. Therefore, VXX does not track VIX itself (spot VIX), but the futures on VIX, which often trade at very different price levels depending on the time to maturity.


Since VXX must roll its futures contracts to rebalance the fund to the later contract, the fund manager is forced to sell the futures contracts that are closest to their expiration dates and buy the next dated contracts, which is a process called rolling. Since longer-dated futures contracts are often at higher levels than shorter-dated ones (during normal market conditions), the rolling activity can result in losses (as the ETN is forced to sell the lower-valued contracts and buy the higher-priced contracts).

In extreme market conditions, when volatility spikes, short-term VIX futures contracts can trade at higher levels compared to longer-term ones and the situation is called backwardation. More often, however, VIX futures are in contango and longer-term contracts trade at higher prices compared to short-term ones.

The iPath S&P 500 VIX Short-Term Futures ETN can be influenced by many unpredictable factors, and the price of VXX can fluctuate substantially between now and the maturity date. Influential factors include prevailing market prices of the U.S. stock market, S&P 500 Index options prices, supply and demand for VXX, as well as economic, political, regulatory or judicial events, or changes to interest rate policies. Basically, anything that affects stock prices can also affect volatility and VXX shares.

The Bottom Line

An investment in VXX might be suitable for investors who want to hedge their portfolios against a market downturn and speculators who have a high risk tolerance. However, since the iPath S&P 500 VIX Short-Term Futures ETN is only composed of derivative contracts, individuals should understand the Cboe Volatility Index and VIX futures before investing or trading the exchange-traded note.

Article Sources
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  1. Barclays. "iPath Series B S&P 500 VIX Short-Term Futures ETN."

  2. Cboe Global Markets. "Cboe VIX Index," Watch Video.

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