iPath S&P 500 VIX Short-Term Futures ETN (VXX)

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Downtrending TVIX Keeps Drawing Inflows
By: Schaeffer's Investment Research | October 29, 2019

• Traders are dumping capital into the 2x VIX futures tracker as fast as TVIX can burn it up
• Investors are still favoring volatility ETNs like TVIX, even as VIX trades down 50% on the year

Everyone loves a good underdog story, and Wall Street investors are of course no exception -- but in the case of the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ:TVIX), some traders are simply taking this trope too far.

The exchange-traded note (ETN) is one of those leveraged volatility products that you've no doubt been warned about; designed to deliver double the daily return of short-term Cboe Volatility Index (VIX) futures with an average of one month until expiration, TVIX is the type of asset that performs best over time frames measured in mere hours. As such, what initially seems to be a "user friendly" way to make a directional bet on volatility can easily go awry in the hands of an inexperienced investor.

What's more, TVIX faces the same structural pressures as its close cousin, the iPath Series B S&P 500 VIX Short Term Futures ETN (BATS:VXX). Both instruments derive their value from a mix of short-term VIX futures -- which, during a "typical" period of contango, will steadily decline in value over their respective life spans to meet up with spot VIX. As such, you could argue that TVIX and VXX are almost built to lose money in "normal" market environments, while delivering outsized returns during the volatility "melt-ups" that have occasionally rocked stocks in recent years.

With that prologue in mind, the 86.9% decline in TVIX shares this year shouldn't be considered altogether shocking -- nor should Friday's new 52-week low below the $10 level. In fact, that could be considered a relatively respectable performance for the double-leveraged volatility tracker, given that spot VIX itself is down more than 50% since the start of 2019.

Slightly more brow-raising, perhaps, is the fact that net inflows into TVIX since Jan. 1 are now teetering around $1.78 billion, in a show of rather vociferous enthusiasm for this backpedaling ETN. This figure becomes even more remarkable when considered in the context of TVIX's current assets under management (AUM) of $1.12 billion -- revealing that fund flows activity into TVIX this year has been akin to trying to fill a sieve with water.

VXX investors, for their part, are leaning more toward the "sheer capital incineration" end of the spectrum. Net inflows arrive at $1.04 billion year-to-date, compared to AUM of $847.56 million.

As further context to this raving enthusiasm for money-losing volatility derivatives, it's worth pointing out that the Commitments of Traders (CoT) report shows that large speculators appear to be once again en route to amassing a climactic net short position on VIX futures, which has generally been a reliable contrarian indicator in the past. But we'd argue that the unrelenting inflows into vehicles like TVIX and VXX shows that there are still plenty of investors bracing for a "black swan"-style blow-up, even as stocks edge into new-high territory.



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