Reminder of why HVU was a joke from day 1 .Just look at the 5 year chart of HVU after you read this..down over 99% since inception, probably closer to 99.9% .
Consider the following scenario: On a snowy New Year’s Day in 2012, an individual investor (we’ll call him Spencer) takes a seat by the fireplace and opens his brokerage statement. He is relatively happy with what he sees: US stocks, which make up the vast majority of his assets, have doubled since the lows of March 2009. However, economic and political risks such as the European debt crisis continue to cause concern, and he wants to protect his gains. Spencer’s friend Victor tells him about the VIX, an index of market volatility that tends to go up when the market goes down. Victor points out that while Spencer can’t trade the VIX directly, he can trade VXX, an exchange-traded note (ETN) that is linked to the VIX. The following day, Spencer buys enough VXX to put his mind at ease. He trusts that, if stocks fall, VXX will provide some protection. Besides, the VIX level seems low enough (23.4, after peaking above 80 during the 2008 financial crisis) that Spencer figures there’s not much downside. Six months later, Spencer sits by the pool and reviews his portfolio. He finds that his US stock investments have risen by about 6%. He notes that the VIX level is 19.6, a 16% drop. But he is surprised to find that his VXX investment is down 54%. Furthermore, he discovers that when the S&P 500 hit a rocky patch from mid-March to early-June (falling nearly 10%), VXX was essentially flat even though the VIX rose by 74%. Confused, Spencer searches the internet for “VXX." He reads that VXX actually tracks not the VIX itself, but “a constant one-month rolling long position in first and second month VIX futures contracts.”1Further exploration leads Spencer to numerous references to “contango” and the dangers of “roll yield.” Realizing that he does not understand what these concepts mean and how they affect his returns, he decides to close out his VXX position. Why did Spencer’s VXX investment behave so differently than the VIX? As Spencer discovered in his online search, many ETNs actually reflect an underlying investment in futures instruments. Indeed, the first panel of Exhibit 1 shows that VXX returns closely track VIX futures returns. While Spencer’s VIX experience represents an extreme example of the futures-spot performance divergence, many investors have experienced similar disappointment (see, for example, the second panel of Exhibit 1)2. So perhaps the relevant question is: why do these futures positions behave differently than their equivalent spot index or spot instrument? Over short periods of time, spot and futures returns tend to track each other closely. For example, the one-day price change of the most active VIX futures contract will typically have the same sign and similar magnitude to the price change of the VIX spot index. However, over longer holding periods the returns can differ significantly, as Spencer experienced. This futures-spot divergence is known as the futures “roll yield,” which we define as the difference in return between a futures contract and its underlying asset.3 The impact of roll yield can be quite significant, in some cases being similar in magnitude to the entire gain or loss an investor experiences on the futures position. However, in spite of the importance of roll yield in futures markets (and associated investments), there is a significant lack of clarity on the issue. Misconceptions persist regarding roll yield’s origin, measurement, impact and relationship to other concepts such as carry trading and trend following. One of the most pervasive misconceptions is that roll yield represents a realized gain or loss generated on the day of the contract roll, as a long investor sells the expiring contract and buys the new active contract (or a short investor takes the opposite steps). Another is that roll yield is an abstract concept and that accounting separately for roll yield and spot market returns is a pointless pursuit. Yet another misconception is that roll yield creates arbitrage opportunities: that an investor can lock in a guaranteed profit by going long markets with positive roll yield and short markets with negative roll yield.