Are VIX Futures ETPs Effective Hedges?

The Journal of Index Investing, Winter 2012, Vol. 3, No. 3, pp. 35-48

25 Pages Posted: 27 Jun 2012 Last revised: 20 Dec 2012

Geng Deng

Wells Fargo

Craig J. McCann

Securities Litigation and Consulting Group

Olivia Wang

Securities Litigation & Consulting Group

Date Written: June 27, 2012

Abstract

Exchange-traded products (ETPs) linked to futures contracts on the CBOE S&P 500 Volatility Index (VIX) have grown in volume and assets under management in recent years, in part because of their perceived potential to hedge against stock market losses.

In this paper we study whether VIX-related ETPs can effectively hedge a portfolio of US large cap stocks. We find that while the VIX increases when large stock market losses occur, ETPs which track short term VIX futures indices are not effective hedges for stock portfolios because of the negative roll yield accumulated by such futures-based ETPs. ETPs which track medium term VIX futures indices suffer less from negative roll yield and thus appear somewhat better hedges for stock portfolios. Our findings cast doubt on the potential diversification benefit from holding ETPs linked to VIX futures contracts.

We also study the effectiveness of VIX ETPs in hedging Leveraged ETFs (LETFs) in which rebalancing effects lead to significant losses for buy-and-hold investors during periods of high volatility. We find that VIX futures ETPs are usually not effective hedges for LETFs.

Keywords: VIX, ETFs, VIX Futures ETPs, Hedge

JEL Classification: G11, G19

Suggested Citation

Deng, Geng and McCann, Craig J. and Wang, Olivia, Are VIX Futures ETPs Effective Hedges? (June 27, 2012). The Journal of Index Investing, Winter 2012, Vol. 3, No. 3, pp. 35-48. Available at SSRN: https://ssrn.com/abstract=2094624 or http://dx.doi.org/10.2139/ssrn.2094624

Geng Deng

Wells Fargo ( email )

1753 Pinnacle Dr
7th Floor
Mc Lean, VA Virginia 22102
United States

Craig J. McCann

Securities Litigation and Consulting Group ( email )

3998 Fair Ridge Drive, Suite 250
Fairfax, VA 22033
United States

Olivia Wang (Contact Author)

Securities Litigation & Consulting Group ( email )

3998 Fair Ridge Drive, Suite 250
Fairfax, VA 22033
United States
7035936770 (Phone)

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