Reaping Roll Yield from a Quasi Volatility Neutral Strategy

On February 8th, I discussed the use of the inverse VIX ETP (XIV) to collect the roll yield from the VIX futures. When stocks fall and volatility rises, however, such a naked short position drops drastically. From 4/2 to 4/10, XIV dropped from 12.29 to 9.94, and lost 19% of its value (it’s now back to 10.37).

S&P 500 VIX Futures Term Structure Index (“Term Structure Index”) models a quasi-volatility neutral strategy that collects roll yield by exploring the difference in betas (to the VIX spot) along the VIX futures curve.

The Term Structure Index is a composite index that measures the return from taking a long 100% position in the S&P 500 VIX Mid-Term Futures Index Excess Return (“Mid Term Index”) with a short, or inverse, 50% position in the S&P 500 VIX Short-Term Futures Index Excess Return (“Short Term Index”), with daily rebalancing of the long and short positions. UBS E-TRACS Daily Long Short VIX ETN (Ticker: XVIX) tracks this index. XVIX returned 9.4% in Q1 2012.

Why does this strategy work? The strategy works based on two observations along the VIX futures curve:

1 – Since 12/20/2005, the Short Term and Mid Term indices have a beta of 47% and 23% to the spot VIX, respectively. So the beta of the Term Structure Index is close to zero.

2 – On average, the daily roll cost of the Short Term Index is around 0.18% while the daily roll cost of the Mid Term Index is 0.07%. So the Term Structure Index collects 0.02% roll yield every day on average.

Does this strategy work all the time? No. When the VIX futures curve is in backwardation, as what we saw in Q3 2011, the Term Structure Index tends to lose money.

For the majority of its history, however, the Term Structure Index shows a steady stream of positive returns at reasonable volatility. In Q1 2012, when the VIX futures curve was in deep contango, the index returned 6.16%. Unlike XIV, it dropped only 0.8% from 4/2 to 4/10. Most importantly, unlike most VIX products in the market (e.g. the Short Term Index, Mid Term Index and the S&P 500 Dynamic VIX Futures Index), it has a low correlation to both S&P 500 and the VIX spot.

Exhibit 1: Total Return History (click the image below to see it in full size)

Exhibit 2: Performance Statistics

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The posts on this blog are opinions, not advice.
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  1. Luis Maio says:

    Good technical issue¡¡ By the way how can I get Historical Prices from 2005 of :
    S&P 500 VIX Futures Term Structure Index
    S&P 500 Dynamic VIX Futures Index
    in order to simulate them in excel format.
    I know that for instance S&P 500 Dynamic VIX Futures Index is availble in Bloomberg as a curve but not in Historical Prices as an excel data.
    Thanks in advance share them or indicate me where i can download them


    • Berlinda Liu says:

      Thank you for your feedback! I downloaded both index levels from Bloomberg; I’m not sure whether you need subscription to these data or not. Would you please check with your Bloomberg account manager? Their tickers are:
      SPDVIXTR Index
      SPVXTSTR Index
      If you still have trouble getting the data, please email me at Thanks!

  2. Art Ford says:

    Berlinda, an interesting article but some issues were unclear. The total return chart referrred to “S&P dynamic Vix futures” and “S&P vix futures term structure”. Which are of these two are ETF returns and which are Index returns?
    What is the relationship of XVIX to the total return chart?

    • Berlinda Liu says:

      S&P Dynamic VIX Futures and S&P VIX Futures Term Structure are two different indices. The chart shows their total return history. XVIX is the ETN that tracks the S&P VIX Futures Term Structure index; XVZ is the ETN that tracks the S&P Dynamic VIX Futures index.

      The index returns shown do not represent the results of actual trading of investor assets. S&P Indices maintains the indices and calculates the index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause actual and back-tested performance to be lower than the performance shown.

  3. Very good article. I absolutely appreciate this site. Thanks!

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