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Is UVXY Shutting Down Due To New SEC Rules?

Summary A look at newly proposed SEC rules. How they could affect ProShares products. A look at the current volatility landscape. Before we get started I wanted to highlight my last article: Neuroeconomics and Volatility . I really enjoyed writing this piece and it is a very different take on your normal volatility reading. Feel free to share this unique piece. A reader of mine recently alerted me to an article that claimed many leveraged ETFs would need to close due to a newly proposed Securities and Exchange Commission (SEC) rule. This article will serve to properly inform readers on how this may affect the ProShares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ). Article In reference to the original article that made this claim, I would like to focus for a minute on the strategy they are talking about. This strategy is close to the ones I have shared with you here on Seeking Alpha in regards to shorting volatility and taking advantage of contango and the effects of leverage. David Miller’s Catalyst Macro Strategy Fund uses a bread basket of many leveraged ETFs to short and take advantage of the decay of the underlying assets over time. He specifically mentions UVXY as one of the funds holdings and maintains a net short position in the volatility ETF. I encourage you to read the article as it presents other ETFs and strategies that we have not discussed in relation to volatility and leveraged ETF investing in general. SEC Comments On 12/11/2015 the SEC proposed new derivatives rules for registered funds and business development companies. You can read the full release here . The bottom line of the proposal, in relation to ETFs, is to prevent funds from liquidating due to extreme moves in their underlying indexes. It appears that this rule may put an end to my dream for a leveraged inverse volatility fund. ProShares Comments According to ProShares (view release here ), they are confident that this proposal will not impact their ability to offer the current 2x inverse and 2x ETF and mutual funds which include UVXY. However, it may impact their ability to operate 3x leverage funds. These funds mainly track broader market indexes and sectors. You can view a list of those funds here . My take I wouldn’t be concerned with the talk about UVXY shutting down and I also wouldn’t let it affected your trading objectives. The only affect this has on my current objectives would be to switch to the iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) options if I am looking at more than a year until expiration, just in case. Any decision the SEC makes will be phased in over time and this proposed rule must still be approved by the Commission and will then be subject to a 90 day comment period. Seeking Alpha is a great place to get up to date information on these types of changes and any new information will surely be covered by myself or other fine contributors. Current Volatility Futures Backwardation has once again appeared. See below: (click to enlarge) Current Futures: (click to enlarge) Conclusion As we move into 2016 I am looking forward to the change in pace of volatility spikes. Hopefully we will move toward a trading environment where we see backwardation events on average every 2-3 months. I am not currently shopping for a large short volatility position unless market conditions deteriorate a little further. I may take small short positions here and there with very short-term trading objectives. Coming up you have the start of a Federal Reserve meeting that wraps up mid-week with a widely held notion that rates will be raised for the first time since 2006. The government shutdown is still on for the end of the week with a consensus that a deal will be struck before then. It doesn’t appear that UVXY is shutting down anytime soon due to the proposed SEC requirements. I wouldn’t panic and recommend you wait until more information becomes available. Have a great end to 2015 and thank you very much for reading.

Finding The Right Volatility ETF

Summary Volatility products can provide market leading returns. Proper education and knowledge of the VIX futures market is needed to be highly successful. Risk factors should be accounted for when creating and implementing your strategy. Welcome to the Seeking Alpha ETF Guide. This article will focus on how a VIX ETF could play an active role in your portfolio. When looking for a VIX ETF you have several different options between short-term and mid-term futures products. This article will cover only the most active funds. For more options visit the Seeking Alpha ETF Hub for a list of all volatility funds. Both types of products (short and mid-term) focus on the VIX Futures which trade independent of the market and the popular and well publicized VIX Index. Short-Term There are two types of short-term volatility products. To determine which type of product is for you, you first need to determine whether you are betting on an increase or decrease in volatility. Long volatility products, such as iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) and ProShares Ultra VIX Short-Term Futures (NYSEARCA: UVXY ) which offers two times the leverage, benefit from increasing volatility. During periods of low or decreasing volatility, inverse products such as VelocityShares Daily Inverse VIX ST ETN (NASDAQ: XIV ) and ProShares Short VIX Short-Term Futures (NYSEARCA: SVXY ), produce better results. All short-term VIX products focus on the front and second month’s contract in the VIX Futures. Mid-Term You also have long and inverse options available in mid-term futures products. For rising mid-term futures you have VelocityShares Daily Inverse VIX MT ETN (NASDAQ: ZIV ) and for decreasing mid-term futures there is VelocityShares Daily Inverse VIX MT ETN . All mid-term VIX products focus on the seventh through fourth month’s contracts in the VIX futures. Mid-term futures products are not as popular as the short-term products. Education Investors looking to use VIX products in their portfolios should have a very high level of education into the inner workings of the VIX Futures market. Seeking Alpha is a great resource for many articles that focus on the how and why rather than the right now. I have written many articles that are specifically geared towards investor education and are meant to serve as training tools for years to come. Since the vast majority of these products have been around less than a decade, back testing is often used to demonstrate the effectiveness of different strategies. Investors should also note there are distinct differences between short-term and mid-term volatility products. A personal pet peeve for me is when I see comments such as “this thing is rigged.” That is a good example of someone who hasn’t educated themselves on volatility and is now mad about their poor decision. Many misconceptions exist in regards to VIX Futures products. A thorough understanding of how these products are structured can prevent expensive mistakes. Trades based on hopes and dreams or borrowed money are a recipe for disaster. A proper education is the only way to prevent failure when trading volatility. Contango/Backwardation A key indicator when determining longer-term directions of volatility products are contango and backwardation. Contango will benefit inverse volatility products, like XIV, while backwardation will benefit long volatility products, such as VXX. For more information on this key metric I recommend this short video . Trading Objectives Long volatility products – Many investors use long volatility products as insurance for their primary portfolio. It is difficult to time spikes in the VIX and these products lose value over time. They are not meant to be buy and hold investments. From historical data, the longest these products have gone without losing value is less than one year. Inverse volatility products – During flat and rising markets, these products can often beat the major benchmark indices. Although I don’t advocate a long-term buy and hold strategy with any volatility products, short-term inverse funds have provided the best returns when held for periods of 2-6 months. Risks This would be the most important section of this article. I have spent countless hours promoting the education and risk factors of investing in various VIX funds. Although these products can provide returns several times greater than the market, they also come with many risks that are hidden to novice investors. I have seen many beginners with high hopes of getting rich quick. They may win the first or second hand but eventually lose all or a very significant amount of their capital by not properly assessing risks before making trades. If you do not fully understand how these products work or do not have a thorough idea of the risks of investing in volatility, my recommendation would be to avoid them while you become more comfortable and complete additional research. Practice accounts and small trades are a great way to build real knowledge on the effectiveness of your strategy. Rising markets make inverse products seem like the perfect investments. However, these products can easily lose 50-80% of their value during periods of economic turmoil. Black swan events are rare but would significantly effect volatility products. Historical examples of these events would include acts of war, terrorism, and other unforeseen events that would have profound impacts on the market. Returns VIX funds have provided some of the best returns over short to medium time frames. Take a look below at some of the best results for inverse and long volatility products: Chart created by Nathan Buehler using backtesting data from The Intelligent Investor Blog . Conclusion The best advice I can give if you are thinking about trading volatility is to learn as much as you can about how these products operate. Test your strategies, document results, confirm successes, and evaluate failures. You should feel very comfortable with using these products before making your first large trade. Seeking Alpha is a great resource to use. By interacting with contributors and other users, you can create your own virtual professional learning community. I hope you have found this introduction to volatility funds useful. Now it is time to start researching and comparing individual funds. Thank you for using the SeekingAlpha ETF Guide!

Sell UVXY: It’s Still A Busted ETF Heading Lower

UVXY is a widow-maker of an ETF, down more than 99.9% over the past five years. A recent trebling in its share price is irrelevant to longer-term investors. UVXY is still a terrible product, sell it or short it. It’s going to drop further. Volatility ETFs are one of the worst inventions to hit retail investors in the past decade. These products that are literally designed to go to zero if you read the fine print in the prospectus. And yet thousands of small-time investors and speculators get sucked into them, thinking this is a good way to bet on, or even prudently hedge against volatile markets. The iPath S&P 500 VIX Short-Term Futures ETF (NYSEARCA: VXX ) is still the gold standard for the space. And it’s a very lousy product. Short it or avoid it. However, with the dark magic that is a leveraged fund, you can take the inherent terribleness of VXX and cube it. Enter the ProShares Ultra Vix Short-Term Futures (NYSEARCA: UVXY ). The Velocity Shares Daily VIX 2x (NASDAQ: TVIX ) is basically the same functional product as UVXY in a slightly different wrapper and with less trading volume, but the same analysis applies. VXX, UVXY, TVIX and other such long volatility instruments are designed to benefit when the VIX rises. However, since VIX – somewhat inaccurately known as the “fear gauge” — is a mathematical construct rather than an actual investable instrument, no ETF tracks VIX properly. What you’re investing in when you buy VXX or UVXY isn’t the VIX you see scrolling across the CNBC ticker but rather a blended combination of futures contracts (derivatives) that aim to predict where VIX will be at a later date. There’s usually a large disconnect because VIX today and VIX in the future, leading to the returns on VXX and UVXY not coming close to what you’d expect just looking at spot VIX changes on the day. The general case against VXX and UVXY is rather simple. Volatility in the future is generally projected to be higher than volatility today. Since traders fear unknown future events more than the present knowable situation in most cases, traders will pay up more for protection farther into the future. Traders are usually more fearful of a crash farther along the horizon than in the short-term. Since VXX, UVXY and others own a mix of current month VIX futures and next month VIX futures, they tend to lose value when they have to rollover contracts. Say spot VIX as quoted on CNBC is 14, VIX futures for September are 16, and VIX for October is 18. Every day, VXX and UVXY have to sell some of their September contracts at 16 and buy Octobers at 18. They lose more than 10% of their net asset value (NAV) every month rolling over. Once October comes, October futures will be down to 16, Novembers at 18, and they’ll lose another 10% rolling again. VXX tends to lose about 70% of its value every year, and it’s largely driven by this effect. The long term impact of this effect, named contango, is most difficult. It’s why these funds always go down over the longer term, and why they make for poor investments. VXX is down from a peak of 7,000 (split-adjusted various times) in 2009 to 29 today. A drop of 99.6% since inception. UVXY’s done even worse, given the 2x leverage, falling from almost 500,000/share (yes, you read that right) to 64 just since 2011! (click to enlarge) Ouch! These are very-poor performing investments that most folks should steer clear of. However, now that the market is dropped and UVXY has tripled off the lows, everyone’s all excited about volatility products again. Now the talk of the town is that volatility is in “backwardation” meaning the usual value-destroying albatross that hits these investments is no longer in play. Backwardation, explained simply, is that now this month’s futures are worth more than next. If you can sell Septembers at 18 and buy Octobers at 16, your (NAV) rises 10% a month. If that state is maintained for awhile, particularly with UVXY’s leverage, you get some fat upside. And yes, that’s all true. But no, it doesn’t generally play out like that. Look at the long-term log chart of UVXY posted above. There were two periods of relatively long-lasting backwardation, during both the 2011 and 2012 market sell-offs. And UVXY and TVIX did indeed benefit from rising volatility and backwardation… however, the increases were very small compared to the larger downward trend. These instruments are so poorly constructed that brief periods of backwardation don’t move the needle. Backwardation almost never persists for a lengthy period of time because the market is almost always more fearful for the future than the present. Unless you’re actively seeing markets go through the floorboards right now, like during the recent Monday’s flash crash festivities, volatility expectations are almost always higher at a later date than what you see at present. While UVXY got to 90 during the current panic, it sold back off to 60 in just two days on a rather modest market recovery. And Tuesday, it dumped 19% again in a single day. Any instrument where you lose 33% of your money in two days or 19% overnight during a fairly routine market recovery is best avoided by most market participants. When you’re long UVXY, you are playing with fire. September VIX futures are currently at 26. Around 15 has been normal during this bull market. So just a reversion to normal wipes out more than a third of VXX’s value, and UVXY will suffer losses greater than that due to the leverage. The lottery ticket type upside in a crash scenario just isn’t worth the near certainty of an 50-75% loss in UVXY in coming weeks as the market and volatility stabilize. Even if you manage to time a sell-off correctly, you’re almost undoubtedly better off just buying puts on the market, through an ETF such as SPY. UVXY may go up 6x-8x if you hit a sell-off just right. Getting that, or a whole lot more, from SPY puts is no more difficult. In a perverse sort of way, it’s nice that these ETFs’ lives have dragged on as long as they have, as they are among the best short sales in the market. It will be a sad day when these sources of easy alpha are taken away from the short-selling arsenal. Disclosure: I am/we are short UVXY, VXX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.