ETF Analysis: iPath S&P 500 VIX Futures

The iPath S&P 500 VIX Short-Term Futures (NYSEARCA: VXX) is an exchange-traded note (ETN) designed to provide investors with exposure to equity market volatility by tracking the S&P 500 VIX Short-Term Futures Index Total Return. The S&P 500 VIX Short-Term Futures Index Total Return is designed to offer exposure to daily rolling lost positions in CBOE Volatility Index futures contracts, which reflect the implied volatility of S&P 500 Index options. Since its inception on Jan. 29, 2009, VXX has an annualized return of -59.19% as of June 2015, while the S&P 500 VIX Short-Term Futures Index Total Return has an annualized return of -58.82%.

As of July 14, 2015, VXX currently has two holdings, the CBOE VIX Future AUG 15 and the CBOE VIX Future JUL 15. The fund's weightings on these futures contracts are 80.79% and 19.21%, respectively. Since the iPath S&P 500 VIX Short-Term Futures ETN is only composed of derivative contracts, individuals should understand the CBOE Volatility Index and VIX futures before investing or trading the exchange-traded note.

The iPath S&P 500 VIX Short-Term Futures ETN is legally structured as an ETN, which is an uncollateralized debt instrument produced and managed by Barclays Capital Incorporated. The ETN is an unsecured debt obligation of Barclays Bank PLC. Any payment to be made on the ETN depends on Barclays' creditworthiness. Therefore, Barclays' financial stability and creditworthiness affect the market value of VXX.

As of July 14, 2015, VXX has two holdings and $856.66 million in assets under management. The ETN is listed on the New York Stock Exchange Arca Exchange and is available for trading through any brokerage account.
Since VXX must roll its futures contracts to rebalance the fund to the later contract, the fund manager is forced to sell the futures contracts that are closest to their expiration dates and buy the next dated contracts. Therefore, the iPath S&P 500 VIX Short-term Futures ETN has a high net expense ratio of 0.89% as of July 14, 2015. However, the net expense ratio of VXX is less than the category average of 1.27%.

Since the iPath S&P 500 VIX Short-Term Futures ETN tracks the CBOE Volatility Index, there are many risks that can affect the market value of VXX. The ETN can be influenced by many unpredictable factors, and the prices of VXX can fluctuate between the purchase date and the maturity date. Factors that may influence VXX include prevailing market prices of the U.S. stock market and market prices of S&P 500 Index options, the supply, and demand for VXX, as well as economic, political, regulatory or judicial events, or events regarding interest rate policies.

As of June 30, 2015, VXX has a trailing five-year alpha of -0.89, a standard deviation of 60.65% and a Sharpe ratio of -1.18. According to these statistics, VXX underperformed the MSCI ACWI NR USD Index by 0.89% and carried a high level of volatility of 60.65%. The ETN's negative Sharpe ratio indicates that it did not provide investors with an adequate return on investment for the amount of risk it carries.
According to modern portfolio theory (MPT), an investment in VXX would be suitable for speculators, traders or investors who want to hedge their portfolios against a market downturn. The iPath S&P 500 VIX Short-Term Futures ETN is recommended for individuals who want to gain exposure to the S&P 500 VIX Short-Term Futures Index Total Return and those who have a high risk tolerance. The VXX is best used for short-term trading due to the time decay of the derivative securities, which can cause the market price to decrease.