Understanding the Key Differences Between Vxx and XIV

What is the difference between Vxx and XIV?

When it comes to investing in volatility-based exchange-traded products, two popular choices are VXX and XIV. Although they both track the same underlying index, the S&P 500 VIX Short-Term Futures Index, there are significant differences between the two.

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VXX, short for Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN, is designed to provide exposure to a daily rolling long position in the first and second month VIX futures contracts. This means that VXX may be suitable for investors who are looking to profit from an increase in market volatility. However, it’s important to note that VXX has a built-in decay factor, which can erode its value over time.

On the other hand, XIV, or Credit Suisse AG VelocityShares Daily Inverse VIX Short-Term ETN, takes an opposite approach. Instead of seeking to profit from an increase in volatility, XIV aims to capitalize on a decline in volatility. It does this by taking a daily short position in VIX futures contracts, which are designed to move in the opposite direction of the VIX index. As with VXX, XIV also has a decay factor that can impact its performance.

While both VXX and XIV can be used to gain exposure to volatility, it’s important for investors to understand the inherent risks and nuances of each product. VXX may be suited for investors who believe that volatility is likely to increase, while XIV may be suitable for those who anticipate a decline in volatility. As always, it’s crucial to carefully research and evaluate any investment before committing capital.

The Fundamental Variances Between Vxx and XIV

The VXX and XIV are two popular exchange-traded notes (ETNs) that track volatility indexes in the stock market. While both products aim to provide investors with exposure to market volatility, there are significant differences in their underlying strategies and risk profiles.

The VXX, known as the iPath S&P 500 VIX Short-Term Futures ETN, is designed to track the performance of the S&P 500 VIX Short-Term Futures Index. This index measures the market’s expectation of volatility over the next 30 days by incorporating the prices of futures contracts on the CBOE Volatility Index (VIX). The VXX holds a diversified portfolio of VIX futures contracts with different expiration dates.

On the other hand, the XIV, or the VelocityShares Daily Inverse VIX Short-Term ETN, seeks to provide investors with the inverse return (opposite performance) of the S&P 500 VIX Short-Term Futures Index on a daily basis. It achieves this by taking short positions in VIX futures contracts. In other words, when the VIX futures decrease in value, the XIV aims to increase in value, and vice versa.

One of the main differences between the VXX and XIV is their directional exposure to market volatility. The VXX is a long volatility product, meaning it tends to increase in value when market volatility rises. Conversely, the XIV is a short volatility product, aiming to profit when market volatility decreases. This distinction makes the VXX more suitable as a hedging tool during market downturns, while the XIV may be more appealing to investors anticipating stable or declining volatility.

Another key difference is the time decay effect. The VXX, being an ETN that holds a portfolio of futures contracts, is subject to the “roll yield” phenomenon. This means that as the VXX rolls over expiring futures contracts into new ones, it may experience negative roll yield if the futures curve is in contango (where longer-dated contracts are more expensive than shorter-dated ones). As a result, the VXX tends to experience gradual long-term value decay. In contrast, the XIV does not suffer from this time decay effect, as it seeks to generate daily inverse returns without holding futures contracts long-term.

Overall, while the VXX and XIV are both volatility ETNs, they vary significantly in their investment strategies and characteristics. Investors should carefully consider their risk tolerance, market outlook, and specific objectives before choosing between the two products.

VXX	XIV
Long volatility	Short volatility
Tracks the S&P 500 VIX Short-Term Futures Index	Inverse return of the S&P 500 VIX Short-Term Futures Index
Holdings are VIX futures contracts	Takes short positions in VIX futures contracts
Subject to time decay	No time decay effect

The Distinctive Characteristics of Vxx and XIV

When comparing VXX and XIV, it is important to understand their distinctive characteristics. These two exchange-traded products (ETPs) are designed to provide inverse exposure to the CBOE Volatility Index (VIX), commonly known as the “fear index”. However, they have different strategies and structures which make them unique in their own ways.

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VXX (iPath S&P 500 VIX Short-Term Futures ETN) is a volatility ETP that seeks to replicate the performance of the S&P 500 VIX Short-Term Futures Index. It achieves this by holding a portfolio of VIX futures contracts. As an exchange-traded note (ETN), VXX is a debt obligation of Barclays Bank PLC. By investing in VXX, investors are essentially taking a long position on near-term VIX futures. This means that as volatility increases, VXX tends to rise in value.
XIV (VelocityShares Daily Inverse VIX Short-Term ETN) is another volatility ETP that aims to provide inverse exposure to the performance of the S&P 500 VIX Short-Term Futures Index. Unlike VXX, XIV takes a short position on VIX futures contracts. This means that as the VIX decreases in value, XIV tends to rise in value. XIV is also an ETN, issued by Credit Suisse AG. It is worth noting that XIV provides inverse exposure on a daily basis, and its value can be significantly affected by market movements on a day-to-day basis.

In summary, VXX and XIV are both ETPs designed to provide inverse exposure to the VIX index. However, VXX takes a long position on VIX futures contracts, while XIV takes a short position. These distinctive characteristics can have a significant impact on their performance under different market conditions. It is important for investors to carefully consider their investment goals and risk tolerance before deciding to invest in either VXX or XIV.

Analyzing the dissimilarities Between Vxx and XIV

When it comes to analyzing the differences between Vxx and XIV, it’s important to understand that these are two completely different products with distinct investment strategies and objectives. While both Vxx and XIV are exchange-traded products (ETPs) that are designed to track volatility indexes, they have opposite directional exposure and contrasting risk profiles.

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Vxx, which stands for the iPath S&P 500 VIX Short-Term Futures ETN, is structured to provide investors with exposure to volatility in the stock market. It tracks the performance of the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of VIX futures contracts. Vxx tends to perform well during periods of market uncertainty or volatility, as it is designed to increase in value when the stock market experiences significant fluctuations.

On the other hand, XIV, which stands for the VelocityShares Daily Inverse VIX Short-Term ETN, is designed to provide investors with inverse exposure to volatility. It aims to deliver the opposite performance of the S&P 500 VIX Short-Term Futures Index on a daily basis. This means that when the index goes down, XIV goes up, and vice versa. XIV is typically favored by investors during periods of market stability and low volatility, as it is structured to benefit from a decline in market fluctuations.

Another important difference between Vxx and XIV is their risk profiles. Vxx is considered to be a high-risk investment due to its exposure to volatility. The value of Vxx can be extremely sensitive to changes in market conditions, and it can experience significant price swings. On the other hand, XIV is generally considered to be a lower-risk investment, as it is designed to benefit from a decline in volatility. However, it is important to note that XIV is not without risk, and it can still experience losses if there are sudden and significant increases in market volatility.

In conclusion, while both Vxx and XIV are ETPs that track volatility indexes, they have opposite directional exposure, different risk profiles, and perform well during different market conditions. Investors should carefully evaluate their investment objectives and risk appetite before considering an investment in either Vxx or XIV.

FAQ:

What are VXX and XIV?

VXX and XIV are two exchange-traded products that track the volatility of the stock market. VXX is the ticker symbol for the iPath S&P 500 VIX Short-Term Futures ETN, which aims to provide exposure to the CBOE Volatility Index (VIX). XIV, on the other hand, is the ticker symbol for the VelocityShares Daily Inverse VIX Short-Term ETN, which offers inverse exposure to the VIX.

What is the difference between VXX and XIV?

The main difference between VXX and XIV is their directional exposure to the VIX. VXX is designed to go up when the VIX rises, indicating increased market volatility. XIV, on the other hand, is intended to go up when the VIX falls, as it provides inverse exposure to the VIX. In other words, VXX profits from market volatility, while XIV profits from market stability.

What is the risk associated with trading VXX and XIV?

Trading VXX and XIV involves inherent risks. VXX can experience significant losses if the VIX drops or remains low, as it is designed to decline over time due to the nature of VIX futures contracts. Conversely, XIV can suffer substantial losses if the VIX spikes dramatically, as it is intended to provide inverse exposure to the VIX. Therefore, traders should be aware of the potential for sharp price movements and carefully consider their risk tolerance before trading these products.

How do VXX and XIV perform during market downturns?

VXX generally performs well during market downturns, as the VIX tends to rise in times of increased uncertainty and fear. In contrast, XIV tends to underperform during market downturns due to its inverse exposure to the VIX. When the VIX spikes, XIV can experience significant losses. Therefore, investors who expect a market downturn may choose to hold VXX for potential gains, while those who want to bet on market stability may prefer XIV.

What factors should I consider before trading VXX or XIV?

Before trading VXX or XIV, there are several factors to consider. Firstly, it’s important to understand the nature of these products and their exposure to the VIX. Secondly, investors should be aware of the risks associated with trading volatility, as both VXX and XIV can experience significant price swings. Additionally, it’s crucial to monitor the VIX and assess market conditions before making any investment decisions. Lastly, investors should carefully evaluate their risk tolerance and investment goals to determine if trading VXX or XIV aligns with their overall strategy.

What are VXX and XIV?

VXX and XIV are two exchange-traded notes (ETNs) that track the volatility of the S&P 500 index. VXX is designed to increase in value when volatility increases, while XIV is designed to decrease in value when volatility decreases.