During the 2008 financial crisis, investors began focusing increasingly on stock market volatility, looking for ways either to hedge against it or to profit directly from it. The most popular product linked to volatility has been the iPath S&P 500 VIX Short-Term Futures ETN (VXX), launched in 2009 and matured on Jan. 30, 2019.
But do not worry that the original series of VXX has matured! The issuer, Barclays PLC, has since issued a similar product to replace the expiring VXX, known as the VXXB (or VXX series B). The old VXX was delisted in January 2019, and in May 2019, VXXB took over the VXX ticker.
The current VXX provides identical exposure as the old with some small structural changes, including an issuer call capability, and a non-path-dependent fee structure. For traders, the tickers VXXB and VXX can be used interchangeably.
A Primer on the VXX
Here are some key facts about the VXX exchange-traded note (ETN).
- Launched in 2009
- Enables investors to bet on the size of swings in the S&P 500 Index (SPX)
- Used by individual investors and hedge fund managers alike
- Peaked at $2 billion under management in February 2018
- Structured as a debt instrument with a maturity date of Jan. 30, 2019
- Replaced by the VXXB, which is virtually identical to the expired VXX
Significance for Traders
When markets fall, nervous options traders can send the CBOE Volatility Index (VIX) soaring. The VIX measures expected volatility (i.e., price swings) in the S&P 500 Index over the following 30 days, based on the trading of index options contracts linked to it.
The VIX often is called a fear gauge for the market. Similarly, the Investopedia Anxiety Index (IAI) was created to assess readers' levels of concern about the economy, the securities markets, and the credit markets.
As the stock prices crash, investors become interested in finding ways to profit from this otherwise bearish market. The development of products linked to the VIX, which is a non-tradeable market index, has become increasingly popular. The VXX, launched in 2009, became the most traded of these products, based on assets and volume.
Structured as an exchange-traded note (ETN), the VXX (and VXXB) trades like an exchange-traded fund (ETF) or a stock. However, ETNs are unique in that they are structured as debt instruments with specified maturities. For the original VXX, that date was Jan. 30, 2019. Investors still holding shares as of then would have received a final payment based on its net asset value at the close on Jan. 29 of that year.
"If you hold your ETNs as a long-term investment, it is likely you will lose all or a substantial portion of your investment," the VXX prospectus warns. Indeed, VXX had lost a 99.96% of its value since inception, due to the high costs of its trading in VIX futures contracts.
As a result of its structure, the VXX only makes economic sense as a day-trading tool for short-term speculation or hedging. That also can be very risky, as evidenced by the collapse of other VIX-linked products when volatility unexpectedly spiked in early 2018.
VXX to VXXB
To replace the VXX, Barclays launched a similar product in 2018, the iPath Series B S&P 500 VIX Short Term Futures ETN (VXXB).
It has a much longer maturity, 30 years rather than 10, and it has an "issuer redemption" option, or call provision. Barclays would use this provision to redeem the VXXB notes early if the product became unprofitable for them to maintain. The VXXB has about $1 billion under management.
Betting on the future direction of stock market volatility can be a highly risky business, as evidenced by the experienced traders and speculators who got wiped out in February 2018. Investors who do not understand the complex risks, or who lack the capital cushion to absorb a complete loss in VIX-related products, probably should avoid them.