UBS' XVIX page here, including factsheet, and prospectus. XVIX is designed to track S&P 500 VIX Futures Term-Structure Index Excess Return, available on Bloomberg as SPVXTSER. The underlying is a daily rebalanced index of :
- short 50% of Short-term VIX futures index, based on which VXX trades,
- long 100% of Mid-term VIX futures index, based on which VXZ trades.
I took the data for the last 5 years (19-Jan-2006 to 19-Jan-2010) and reproduced the underlying indexes, labeled as their corresponding ETFs, in the same colors as UBS' website. According to my calculations in the past 5 years index rose 193%, or 24% annualized, with the maximum drawdown of 15% in the fall of 2008 (the drawdown lasted only two months) . Performance by the year is as follows:
- 2006 Return 11%, MDD 12%
- 2007 Return 18%, MDD 15%
- 2008 Return 14%, MDD 15%
- 2009 Return 24%, MDD 10%
- 2010 Return 55%, MDD 5%
Why did the analysts at UBS chose this particular set of parameters -0.5/+1 for the ETF? I have compared other possible allocation ratios from -2/+1 to 0/+1, and calculated sharpe ratio (return / standard deviation) and calmar ratio (return / maximum drawdown). So in my simulation I am always short VXX, and long VXZ, starting from short twice VXX on the left, to short no VXX and just long VXZ on the right. Before I calculate the ratios I adjust portfolio weights to have the same notional (1.5) as XVIX.
Allocating -0.54/+0.96 results in the highest sharpe ratio, and -0.48/1.02 in the highest calmar ratio.One can plainly see that in hindsight the best allocation is very close to -0.5/+1 XVIX allocation.
Are these parameters stable? Using calmar ratio the best allocations for different years are
- 2006 -0.66/0.84
- 2007 -0.40/1.10
- 2008 0.00/1.50
- 2009 -0.62/0.88
- 2010 -0.54/0.96
Using sharpe ratio the best allocations for different years are
- 2006 -0.75/0.75
- 2007 -0.37/1.13
- 2008 -0.29/1.21
- 2009 -0.62/0.88
- 2010 -0.53/0.97
Although range of parameters seems to be wider, 2008 is not an anomaly in this optimization. The total performance now ranges from 20% to 35% with MDD from 21% to 41%. Ignoring 2010 performance now ranges from 21% to 22% with MDD from 22% to 41%.
It seems to me that UBS' choice of parameters was clearly the result of optimization, however the parameters are relatively stable over different periods, and performance is adequate for a reasonable range of parameters. In other words, I think that there is a reasonable expectation that XVIX can take advantage of VIX futures term structure to produce positive returns. Under the range of parameters analyzed above the worst case expectation for XVIX to return 20% per year with MDD up to 41%.
Full disclaimer: there is some mathematical research on quantifying different biases of backtesting results. I am not familiar with such research, and I think that it would come very helpful in evaluating XVIX, as opposed to simple analysis that I did above. If any of the readers is familiar with such research, please email me a note or a link.