July 25, 2017 - 1:34pm EST by
2017 2018
Price: 96.34 EPS 0 0
Shares Out. (in M): 9 P/E 0 0
Market Cap (in $M): 847 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 847 TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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  • ETF
  • Well that escalated quickly


XIV is a badly designed product that will get crushed when the VIX (CBOE volatility index) spikes.  It is a good short.

People may or may not hate this idea, because it isn't really a traditional value investment per se.  It is more of a reversion to the mean play with the added benefit that it will make money when you probably will want to have some more money to buy things.  I can't find lots of great traditional value investments at the moment so sorry about that.  So let's start with the basics.  XIV is an exchange traded note issued by Credit Suisse that tries to mimic the inverse of the daily performance of the SPVXSP index.  The SPVXSP index measures the return from a daily long position in the first and second month contract in VIX futures contracts traded on CBOE with a weighted average maturity of one month.  However it won't mimic that performance due to 1) fees (1.35% annualized fee charged daily) 2) volatility drag 3) ongoing roll costs or benefits. Rainmain1080 wrote this security up in 2011 and I'd encourage you to check out the thread.  

The relevant document for the ETNs is the pricing supplement (http://app.velocitysharesetns.com/files/prospectus/PRICING_SUPPLEMENT_No__VLS_ETN-1_A31_long_form_2.PDF)  There are some great examples of how the product can wildly diverge from its index over the long term.

I'd posit that XIV is simply a poorly designed product for a long investor.  As Rainman1080 pointed out it is *less* poorly designed than the long products or leveraged long products, but it is still a bad product- the kind of thing Wall Street continually creates to jam down naive retail investors throats.

First, it is a note issued by Credit Suisse that matures in 2030.  You have unsecured Credit Suisse credit risk.  Credit Suisse has free money.

Second, the fee at 1.35% (taken daily) isn't exactly cheap.

Third, Credit Suisse can cancel out your notes early if there is a big move in pricing.  From pg. PS-17:

"It is possible that your ETNs may be accelerated due to a fall in the Intraday Indicative Value to 20% or less than the prior day’s Closing Indicative Value and your investment will be lost before the scheduled maturity of the ETNs Because the Intraday Indicative Value is calculated throughout each Index Business Day, adverse daily performances of the applicable underlying Index on an Index Business Day will be reflected in the current Closing Indicative Value rather than only upon redemption, acceleration or at maturity. If there are severe or repeated adverse daily performances for the applicable underlying Index during the term of the ETNs, the Intraday Indicative Value on any Index Business Day could be reduced to 20% or less of the prior day’s Closing Indicative Value. If this occurs, we may choose to exercise our right to effect an Event Acceleration of the ETNs for an amount equal to that day’s Closing Indicative Value and you may not receive any of your initial investment."

As if you needed any more warning that this a product designed to lose money have a look at the risk factor on PS-15:

"The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment."

Basically, the XIV is a product that picks up nickels in a front of trains and gives CS the option to shut you out of the product at a time that is good for them (when you've lost a lot of money).  The time to own this thing is AFTER a huge spike in VIX as Rainman1080 suggested in his writeup.  Well, right now we are in the exact opposite situation - the VIX is at unprecedented lows. 

Let me demonstrate this for you (with the caveat that the data don't go back terribly far).

The UX1 Index on Bloomberg is the next expiring VIX contract.  Data runs from 03/26/2004 to present.

The ALL TIME low for this index was on 07/19/2017 at expiration of the contract at 9.85.  The max was 67.95 on 11/17/08.   The current contract is at 11.12.  (The market is in contango so the outer months are higher than spot).  The average value for 3,356 days for which we have data is 19.37, the median is 16.65.  The UX1 has been at or below the current price only 30 days out of 3,356 or less than 0.9% of the time.

The UX2 Index (which captures the month after the UX1 index) looks similar.  Current contract is 12.46.   Average value is 20.26, median is 17.95.  Current price has only been lower 1.9% of time.  All time low was on 07/19/2017 at 11.52.  The max was 59.77 on 11/20/08.

UX1 and UX2 capture the actual contracts that make up the index so I think they are the most relevant. There is always of course the risk that our data set is too short here, but we can look at the spot VIX for a more historical perspective.  There data goes back to 01/02/1990.  The all time low for the spot VIX was 9.31 on 12/22/93.  As I am writing this the VIX is at 9.31, so we'll see if it closes there today. The max was 80.86 on 11/20/08. In the 6,943 days for which I have data the VIX has closed below 10 only 25 times.  The average reading is 19.5 and median is 17.6.  

I think there is very limited risk that the VIX declines significantly from here.  There are numerous examples of huge spikes in the VIX.  Given how low it stands today, a spike in the VIX back to even average levels would cause a very significant loss for XIV and possibly result in CS exercising their right to close out the product.  In the past 5 years the VIX has spiked to 20 nearly a dozen times.  I see a very high probability this will happen again. The trick is when.


  • There is a real cost to having this trade on.  With the futures curve in contango I'd expect it to cost as much as 10% per month to have the trade on due to the shape of the curve. The borrow is cheap but not zero.  Size appropriately.
  • It is hard to know when the VIX will spike, but it always has in the past and it seems unlikely not to in the future.  If you still believe the market is bipolar then this trade should interest you.  However, my crystal ball on when the spike will come isn't any clearer than the next guy's.  It sure doesn't feel like the least risky market in history and I'd posit that once the algos start selling and ETF flows pile on.... Let's just say the kindling appears to be there for an epic spike in volatility - we are just waiting for the match to light it.
  • You could just put this trade on with options or futures.  I like the ease of the ETN and also that the product itself has so many flaws for a long-term long investor.
  • I've read the argument that we are at a permanently lower level of equity volatility due to central bank intervention, etc. etc.  I don't buy it, but I've been wrong before.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


VIX (and therefore VIX futures) spike on a change in risk/volatility expectations like it has so many times before.

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