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Tuesday, January 13, 2015

Speaking of which, I'm now less scared about market distortion thru XIV

Speaking of which, I'm now less scared about market distortion thru XIV.

I realized that, if it really was distorting the US equity market, the critics would be able to present futures volume data to back up their point, and yet they haven't.

Look. If the XIV ETF operates by selling short the first and second month $VIX futures, then it's only doing something that CBOE participants could have been doing already for years, right?

If a XIV buy-and-hold strategy was making 5x the profit of a SPY position til June last year, then that means that before XIV existed, the traders could also have made 5x the profit of SPY simply by using the same strategy as XIV.

And if they could have done that 10 years ago, then they must have already been doing it.

And if they did, then the market would already have quickly adapted to eliminate that advantage, because there's not supposed to be any such thing as a trading method that is allowed to consistently beat a passive index strategy.

So the existence of XIV adds nothing new to the market, except an influx of new capital via retail participation in the ETF. That might make the near-month $VIX futures fly around a bit more than they did before, since it's retail and not just futures traders now, but that adds volatility to the US market and that's something we can trade. Big whoop.

XIV as a buy-and-hold should probably be dead by now, and the chart seems to suggest that it died last June or so. But I don't see anymore how XIV could cause chaos in US equities: whatever the market could have done before to wipe out a short-the-near-month-CBOE-$VIX-futures advantage, it can do today.

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