May 23, 2017
There’s a little ETN out there on the stock market with the ticker XIV. Pay attention, because XIV has the potential to turn many readers into millionaires.
XIV is an exchange-traded note created by VelocityShares, and is traded like any normal stock. Since its inception on November 29, 2010, it has been trading millions of notes or “shares”. XIV aims to track 1X inverse VIX futures. In simpler terms, when VIX goes up, XIV goes down (usually, we will get into this later), and vice versa. As the volatility of the S&P 500 (VIX) decreases, XIV increases in value. So, how does this product have the potential to make you millions?
XIV derives its value from a “rolling” of the front two months of the VIX futures term structure. Typically, this term structure is a curve. As you can see below, the front month is at 12.250 and the second month is at 13.160. These are two different values, so XIV’s value is constantly changing. If we divide month2/month1, we arrive at a value of 1.0743. So, the 2nd month is 7.43% higher than the 1st month.
If those two values do not move over the course of a month, then XIV will have appreciated by 7.43% in that month. Since inception, there has been an average contango of 5.81%. So, every month XIV has had an average of a 5.81% boost to its value. Compounded, that is about 71% annually. On average, XIV has had a boost of 71% annually. So, even if there are huge VIX spikes, over time, XIV will greatly appreciate in value.
That 71% is the boost XIV receives annually, on average. But, how has XIV actually performed? Since inception, XIV has returned about 42% annually. Of course, we’ve been in a bull market during XIV’s entire lifetime. Luckily, there are simulations run by investing.kuchita.com that investors use that are highly accurate. So, since March 26, 2004, XIV would have returned about 31% annually. This is still a mind boggling return, considering the fact that the calculation includes the 2008 Financial Crisis.
Without getting into too much detail, this is the crazy (or is it?) pitch I have: put $1,000 into XIV and check back in 30-40 years. I have a hunch that you’ll be happy with what you find. Of course, our BCK Volatility Strategy trades XIV (and UVXY) to avoid stressful drawdowns and increase returns (over 100% annualized), but the buy & hold XIV strategy is perfect for those that like to invest & forget.
