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VIIX vs VXX: Which Volatility ETF Is Better?

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The first point to note in VIIX vs VXX analysis is that VIIX and VXX are both ETFs and volatility index (VIX) exchange-traded products.

This means that these ETPs are useful as volatility hedges.

Laying this foundation will enable you to look out for the details of each ETF, then compare the two and make an informed decision.

This is precisely what this article will be about.

However, VXX is linked to the “total return” version of the S&P 500 VIX Short-Term Futures Index, while VIIX is linked to the “excess return.”

VXX is also considered more popular and liquid than VIIX.

As an ETF investor or intending investor, this VIIX vs VXX analysis will guide you in choosing which ETF to invest your money in.

VIIX vs VXX Graphic

 

VIIX vs VXX Fund Comparison

The primary difference between VIIX and VXX is the issuer of the ETN.  VIIX is issued by Credit Suisse, while Barclays Capital issues VXX.  VIIX and VXX are both volatility index (VIX) exchange-traded products for short-term trading.

The VIX also called the “fear index,” provides an alternative for investors when the market is bullish.

VIIX vs VXX Comparison Chart

VIX came into the picture around 1987 as a solution to fear or uncertainty in the market.

The VIX is typically inversely correlated to the SPX, that is, the S&P 500.  This connotes that, most times, the price of VIX goes up when there is uncertainty in the marketplace, causing a decrease in the price of the SPX.

Inversely, when the price of SPX goes up, the price of VIIX goes in the opposite direction.

Secondly, VIX is similar to RUT or SPX; its shares are non-tradable.

However, there is a way around trading VIX, buying exchange-traded funds (ETFs) or exchange-traded notes (ETNs) tied to VIX.

 

VIIX Description

Fund Family Name: Vanguard
Benchmark Index Name: S&P 500 Index
Product Type: ETN (exchange-traded note)
Issuer: Credit Suisse AG
Provider: VelocityShares
Inception Date: November 2010
Expense Ratio: 0.89%

VelocityShares Daily Long VIX Short-Term ETN (VIIX) is an ETF that is designed to track the performance of the Standard & Poor’s 500 Index, thereby serving as a benchmark index.

The ETNs are not intended to be “buy and hold” investments.

ETNs are riskier than securities that have long-term investment objectives.  Therefore, they are unsuitable for investors who plan to hold them for more than one day.

This makes VIIX more of a tool for traders rather than investors.

VIIX employs an indexing approach to track short-term futures.

To replicate the investment return of the target index (S&P 500) by investing in the same stocks.

VIIX invests almost all or all of its assets in the same stocks that make up the S&P 500.  It holds each of these stocks in almost the same proportion as its weighting in the S&P 500 index.

In line with the market-cap weighting structure, the fund invests in firms such as Apple (AAPL), Exxon Mobil (XOM), and General Electric (GE).

All companies must have a 50% public float to be considered in the benchmark.

***VIIX ceased trading on July 2nd, 2020.

 

VXX Description

Fund Family Name: Vanguard
Benchmark Index Name: S&P 500 Index
Product Type: ETN (exchange-traded note)
Issuer: Barclays Capital
Provider: iPath
Inception Date: January 2009
Expense Ratio: 0.89%

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) is the exchange-traded product issued by Barclays Capital that tracks the S&P 500 VIX Short-Term Futures Index.

This index provides exposure to futures contracts on the CBOE Volatility Index with average one-month maturity.

VXX’s underlying index exposes investors to a daily rolling long position in the first and second-month VIX futures contracts.

In addition, it reflects the implied volatility of the S&P 500 Index at different junctures along the volatility curve.

In other words, it shows what the market participants think regarding the future of the VIX index at the time of the VIX futures contracts expiration.

Amongst the many options for trading the VIX, VXX is one of the most popular.  It was the first product of the VIX.

VXX is a liquid volatility ETP.  As an ETN, VXX is backed by Barclays’ credit rather than by assets.

The fund underwent a restructuring in 2019, which included a non-path-dependent fee structure and an issuer call capability.

VXX has an expense ratio of 0.89% and has over $730 million in assets under management (AUM).

 

VIIX and VXX Not Fit For Long-Term Investors

Although ETNs are the most common.  The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) is one of the largest, most popular, and most successful VIX exchange-traded products.

This ETN holds a long position in first and second-month VIX futures contracts that roll daily.

Due to the insurance premium that usually accompanies longer-dated contracts, the VXX experiences a negative roll yield.

From a primary interpretation, investors who hold VXX long-term are set to see a penalty to returns.

Judging from this analysis, VXX would be better for a short-term investment; the performance is strong in the short term and weak in the long term.

We see that VXX often trades higher than it should during periods of low present volatility (pricing in expectation of increased volatility).

The fund trades lower during periods of high present volatility (pricing a return to lower volatility).  All these are the resulting volatility being a mean-reverting market event.

 

VIIX vs VXX Key Points

In summary, both VIIX and VXX are ETFs to invest in when you suspect the market to fall.

However, while VXX is concerned with total return, VIIX is concerned with excess return.  VXX, the first VIX ETN, is more popular and liquid and has shown better performance than VIIX.

However, as a VIX investor, you should know that Volatility ETPs are not the best for long-term exposure to the VIX index.

They lead to the loss of vast sums of investor capital over holdings periods as short as a few days.

Still, especially for VXX, short-term VIX ETPs may offer more exposure and statistical correlation to the VIX than midterm products.  This, however, also makes it more liable to position decay from contango in their futures positions.

VXX is much more expensive than VIIX, with an expense ratio of 0.89%, against 0.02% for VIIX.  One of the reasons for VXX’s high fees may be the daily rolling function.

A high expense ratio such as this can grossly discourage investment because, in the long term, it will make a huge difference in return.  That being said, these are not long-term investments.

Let’s get a picture of a life application: if you invest $1000 in the two funds at a 0.89% expense ratio for VXX, you’ll be charged $8.90 yearly as management fees.

With VIIX, the fund charges you $0.20.  That’s less than $1 in a whole year’s management fees.  With this, you can see that VXX is much more expensive than VIIX in investment management.

VIIX requires a minimum investment of $100,000,000 for a standard account, while VXX requires no minimum investment.  Although, if you are using an IRA with the VIIX, there’s no minimum account required.

Lastly, let’s consider these ETFs’ performances.

 

VXX Performance

Here is the investment returns of VXX based on various periods:

  • One month: 11.27%
  • Three months: 1.68%
  • One year: -67.74%
  • Three years: -45.95%

VXX Performance

Generally, VXX’s return is linked to the performance of the S&P 500 VIX Short-Term Futures Index TR.

 

VIIX Performance

VIIX investment returns show:

  • One month: 4.01%
  • Three months: -4.19%
  • One year: 15.21%
  • Three years: 19.25%

VXX has not performed well in the last 1-3 years; thus, VIIX performs better.

 

VIIX vs VXX Which Volatility ETF Is Better?

iPath S&P 500 VIX Short-Term Futures ETN (VXX) is a popular option for volatility alternatives for short-term investors.  It had been around a year plus before the arrival of the VIIX.

If your concern in VIIX vs VXX is credibility, then VXX becomes the best choice.

The iPath product is linked to the total return version of the S&P 500 VIX Short-Term Futures Index.  The VXX, the VelocityShares S&P 500 VIX Short-Term ETN (VIIX), is linked to the S&P 500 VIX Short-Term Futures Index Excess Return.

Therefore, it tracks a slightly different index.

This difference may or may not significantly affect the return or performance of these ETPs.  However, contangos may cause some headwinds for VXX.

VXX’s management fees are far higher. If you seek cheaper VIX options, VIIX would be the best option.  But, a minimum amount of $100,000,000 means that you can’t invest in the index if you don’t have up to $100,000,000.

So, while the low management fee is applaudable, most likely, you can only invest in the fund if you are a high-profile investor.

In summary, if you can afford the minimum investment, take advantage of the 0.02% expense ratio. But if not, you could invest in VXX with any amount you have and face the high expense ratio of 0.89%.

As you can see, none of the indexes look appealing to long-term investors.

If you are looking to build long-term wealth and financial independence, you can take a look at these better ETFs:

Better ETFs For Wealth Building:

 


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This information is my opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.