VIX Futures Index Rolling, ETF Exposure, and Long-Run Decay
Summary
The document asks how a short-term VIX futures index’s daily roll weights translate into the holdings and cash flows of an exchange-traded product. It uses a dated example with two adjacent futures prices to question how a roll handles a price difference, and wonders how the opposite cash shortfall would be funded when the curve is in contango.
It also asks why a mid-term VIX futures total-return index could fall sharply over time even though spot VIX is described as mean reverting, noting that index decay cannot be attributed to ETF transaction costs alone. The post raises useful distinctions among spot volatility, futures exposure, roll mechanics, and index performance, but supplies no answer or supporting analysis. Its example does not establish an actual product’s rebalancing procedure, and the long-run chart observation is not accompanied by a methodology or benchmark comparison.
Key ideas
- A futures index roll changes exposure between nearby contracts according to specified weights.
- The post questions how price differences during a roll affect the amount invested or cash available.
- Spot VIX behavior and the performance of a futures index are distinct subjects.
- The document raises the possibility of persistent futures-related decay but does not explain or verify its source.
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Full text
# How VIX ETF Rolls to follow the SP 500 VIX Index # How VIX ETF Rolls to follow the SP 500 VIX Index I was reading the Methodology that S&P uses in order to construct VIX index VIX S&P Methodology If I understood it right, the VIX Short-Term Futures Index works as follows: Notice that both weights in the numerator an denominator are from the day (t-1) and are defined as: and So they have a daily rolling that is a fraction of the Contract Roll period. At the start of the period dr/dr = 1/(Days Between Periods) and (dt - dr)/dt = (Days Between Periods - 1)/(Days Between Periods) So far so good. What I don't understand is how an ETF for example iPath® Series B S&P 500® VIX Short-Term Futures™ ETN (VXX) Implements this and manages the excess or the lack of nominal to perform the roll. Let me put an example to explain it: October 12, 2022: VIX 1º Line: 32.174 VIX 2º Line: 31.778 When doing the roll, 1/(Days Between Periods) ¿contracts? are sold for the 1º Line futures and 1/(Days Between Periods) ¿contracts? are bought for the 2º Line futures, if so, and supposing that 1/(Days Between Periods) = 1, they will receive 32.174 for the sell of the 1º Line contract and they will buy the second line at 31.778 having an excess of liquidity 0.396 USD/contract. How does the ETF manage the Liquidity excess? (If the Forward curve is in Contango, there will be the opposite problem, they will not have enough liquidity to buy the second-line futures) I expose another problem, that is maybe related, The VIX index have reversion towards the mean (bewteen 10-40) but looking at SP 500 VIX Mid Term Futures TRI, the historical chart is negative exponential ( with a starting value in 2008 at 222k and an actual value of 19k): How this is explained? This cannot be due to transaction cost as it is not the ETF is the Index
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