Adverse Effects of ETPs Which Replicate Daily Returns of an Index

Happy New Year!

Before I get to VIX topics, today we kick off 2013 with passage of the "American Taxpayer Relief Act of 2012" which maintains the current income tax rate structure except for individuals making more than $400k/year. Somewhat counter to the name of the bill, everyone will see their taxes rise as payroll taxes increase revert back to 6.2% from 4.2% and additional taxes are withheld to fund the Affordable Care Act (AKA Obamacare).   You can read the entire text of the bill here.

All in all, the bill's provisions closed the U.S.'s $1,089 Billion annual deficit by $62B and taxes are still going up for all Americans. It increases the chances for a U.S. credit ratings downgrade in the next couple months and will create a slight drag on GDP for 2013.

While I was enjoying some vacation over the past couple of weeks the markets experienced a 27% round trip move in VIX, moving from 17.84 to 22.72 and back (now at 15.31 as I write this).  Volatility ETPs have been choppy since I made my exit from XIV on 12/11. Remember that these ETPs return the daily change of an underlying index. The adverse effects of ETPs which replicate daily performance returns of an index in a choppy market are apparent over this period:
  • VXX (short-term VIX futures): -0.35%
  • UVXY (2x short-term VIX futures): -8.3%.
  • XIV (inverse short-term VIX futures):  -7.4% 
Conditions for trading VIX ETPs remain a bit rough at this time. Stay tuned for VIX trades as the day and year unfold.

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