Using SVXY to Capture the Volatility Risk Premium

In response to “Shorting VXX with Crash Protection”, which investigates shorting iPath S&P 500 VIX Short-Term Futures (VXX) to capture the equity volatility risk premium, a subscriber asked about instead using a long position in ProShares Short VIX Short-Term Futures (SVXY). To investigate, we consider two scenarios based on monthly measurements:

1. Buy and Hold – buy an initial amount of SVXY and let this position ride indefinitely. This is a long-term investment strategy.
2. Monthly Skim – buy the same initial amount of SVXY and move to SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) any month-end gains over the initial investment (the beginning-of-month SVXY position may become smaller, but not larger, than the initial investment). This is more an income-generating investment strategy.

The offeror changed the SVXY investment objective at the end of February 2018 (when short VIX strategies crashed), more conservatively targeting henceforth -0.5 times the daily performance of the S&P 500 VIX Short-Term Futures Index rather than -1.0 times as before. We therefore examine SVXY performance separately before and after that change. We assume switching frictions of 0.25% for movements of funds from SVXY to BIL in scenario 2. Using monthly adjusted closing prices for SVXY and BIL during October 2011 through December 2023, we find that: (more…)