VIX Futures ETNs: Three Dimensional Losers

This research tests the performance of volatility Exchange Traded Notes (ETN) and Funds and compares the results to three benchmarks to determine whether the risk-adjusted returns are sufficient to compensate for the high risk and high expenses. Two tests are composed along three dimensions to establish the magnitude and frequency with which the volatility funds outperform the benchmarks. The first dimension tests the robustness of the fund performance to the construction of the portfolio. The results provide evidence that the strong negative correlation between the S&P 500 and ETN returns is not sufficient to consistently produce risk-adjusted returns greater than the benchmarks. The second dimension tests the sensitivity of the results to one-day, one-week and one-month holding periods. The findings indicate that changes in the holding period alter the identity of the successful portfolios but the number of successful funds remains low regardless of the holding period. Finally, the third dimension employs two different weighting methods to the construction of the portfolios. Once again, the findings show that the number of successful portfolios produced by either weighting method is low and unimpressive relative to the benchmarks. Overall, the evidence suggests that the poor performance is unique to volatility ETNs rather than to volatility in general.