
Volatility ETFs Are Broken – $XIV Down 70% in After-Hours Catastrophe - ca98am79
https://ibankcoin.com/flyblog/2018/02/05/volatility-etfs-broken-xiv-70-hours-catastrophe/#sthash.XDX285Tk.dpbs
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chollida1
I mean leverage and inverse ETF's aren't broken, they are behaving as desired.

You just should never, ever hold one overnight as per the SEC guidelines due
to how they reset each night.

[https://www.sec.gov/investor/pubs/leveragedetfs-
alert.htm](https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm)

I can't think of a single valid reason to hold a leveraged ETF overnight. If
anyone has one, please let me know:)

The awesome KidDynamite blog goes into how these ETF's are re-balanced and how
they can "rip your face off" if you don't understand them.

[http://kiddynamitesworld.com/leveraged-etf-trading-flow-
case...](http://kiddynamitesworld.com/leveraged-etf-trading-flow-case-study-
gold-miners-gdx-nugt-dust/)

[http://kiddynamitesworld.com/leveraged-etfs-and-high-
school-...](http://kiddynamitesworld.com/leveraged-etfs-and-high-school-level-
mathematical-truths/)

~~~
snthpy
Nothing too mysterious in the examples in the SEC Alert link. One just has to
keep in mind that these ETFs leverage the daily return and then take into
account the compounding effects. If you have an index with normally
distributed returns with mean m and volatility v, then the long term compound
return c is

c = m – 0.5 v^2 .

An ETF which leverages k times will have returns with mean km and volatility
kv. The ETFs long term compound return e will be

e = (km) – 0.5 (kv)^2 = k m – k^2 0.5 v^2 = k (m – 0.5 v^2) – (k^2 – k) 0.5
v^2 = k c – k (k – 1) 0.5 v^2.

For k > 1, the second term will always be negative so the ETFs return will
always be less than the leveraged compound return of the underlying index.

Whether the leveraged ETF return will be more or less than the underlying
index return depends on whether

c > (k – 1) 0.5 v^2 <=> m – 0.5 v^2 > (k – 1) 0.5 v^2 <=> m > k 0.5 v^2 <=> m
/ (0.5 v^2) > k.

In other words, the leverage k has to be kept less than the m / (0.5 v^2)
which is the well known Kelly Criterion.

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tveita
I don't know if this is a recent phenomenon or if I just haven't known where
to look before, but after the stock fall I'm seeing links to remarkably
unsophisticated "investors communities" of a kind I'd only seen for
cryptocurrencies before.

The description of these XIV derivatives just screams "run" to me, they're
pretty much guaranteed to eventually drop to 0 if you hold them long term.
Maybe they have some sort of hedging purpose in n-dimensional financial chess,
but there's no way they should have been part of someone's personal portfolio.
And yet I've heard multiple tales of people trading them, even on margin!

I'm reservedly optimistic about trading platforms like Robinhood, but maybe in
the end they'll turn out to be just another way to funnel dumb money into a
bubble.

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joezydeco
XIV is dead.

[https://www.marketwatch.com/story/credit-suisse-announces-
pl...](https://www.marketwatch.com/story/credit-suisse-announces-plan-to-
liquidate-xiv-inverse-volatility-etn-2018-02-06)

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hcknwscommenter
I just don't get it. Broken? The darn thing has done almost exactly what it
was designed to do. VIX futures went up after hours, way up, and XIV went way
down. That is how an inverse VIX futures product is supposed to work. I would
buy some right now if they hadn't announced liquidation.

People are acting like the ability of a product to go to zero, or close to it,
should be a deal breaker, i.e., that such products should not exist. That is
crazy. Individual common stocks go to zero (bankruptcy) all the time.

