In Europe, ETFs and ETNs linked to the S&P 500 VIX Futures Indices and the VSTOXX Futures Indices collectively have nearly $380 million in assets ), as listed in Exhibit 1 (note: volume is the average daily volume in December 2011).
Compared with the S&P 500 VIX Futures Indices, the VSTOXX Futures Indices show similar diversification properties (details) and sensitivity to VSTOXX spot movements. Since inception, VSTOXX Short Term Futures index has a beta of 48% and the VSTOXX Mid Term Futures index has a beta of 24%. For your reference, the S&P 500 VIX Short Term Futures index has a beta of 47% with the VIX spot, and the S&P 500 VIX Mid Term Futures index has a beta of 23%.
For investors who use the S&P 500 VIX Futures Index Series as a diversification tool in a broad equity portfolio, the term structure decay (especially in the S&P 500 VIX Short-Term Futures Index) is the inevitable cost of a passive hedging strategy (details). This cost has spurred the development of a second generation of “smart” indices and related ETFs and ETNs, which use algorithmic strategies to either roll or package dynamic allocations in volatility.
In Europe, ETFs linked to two indices seek to give investor positive exposure to volatility at reduced holding cost:
- S&P 500 VIX Futures Enhanced Roll Index. Switches between the S&P 500 VIX Futures Short Term Futures Index and a mid-term VIX futures portfolio that holds a rolling position in the third, fourth and fifth month VIX futures contracts. Lyxor issued an ETF (LYMJ GS) on this index.
- Nomura Voltage Mid-Term Index. Allocates between the S&P 500 VIX Futures Mid Term Futures Index and 3-month US Treasury. Nomura issued an ETF (VOLT LN) on this index.
Both indices aim to capture spikes in volatility while mitigating the cost of holding a systematically long volatility position. Exhibit 2 and Exhibit 3 show the historical performance of the two indices between May 2011 and December 2011.
Exhibit 2: Performance Statistics of Cost Effective S&P 500 VIX Futures Indices (May 2011 – Dec. 2011)
Exhibit 3: Cost Effective S&P 500 VIX Futures Indices (May 2011 – Dec. 2011)