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Why SVXY Survived the February 2018 VIX Spike

Article Quant Q&A · Author: Alex R
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Summary

This exchange explains why SVXY, a daily inverse VIX futures exposure, did not lose all its value during the sharp volatility episode of February 2018. The key distinction is between the VIX index, which is calculated from options and is not directly tradable, and the futures contracts held by volatility products. SVXY tracks a short-term VIX futures index using positions in two futures maturities that are rebalanced toward a target duration, rather than shorting spot VIX itself.

The accepted answer reports that the index rose from 56.28 to 110.37 on February 5, leaving the fund with less than 4% of its indicative value. A move above 100% in the tracked index would, in the stated design, drive indicative value to zero; volatile-market tracking error may affect the observed value. Another answer notes that the futures curve need not rise by the same percentage as spot VIX, and a further reply points to daily leverage and path dependence. The discussion does not fully model those effects or establish that the structure is protected from losses in future extreme events.

Key ideas

  • SVXY tracks a short-term VIX futures index rather than the non-tradable VIX spot index.
  • Its exposure uses short positions in futures maturities and is rebalanced daily toward a target duration.
  • The tracked index rose from 56.28 to 110.37 on February 5, 2018, leaving less than 4% indicative value.
  • Spot VIX percentage changes do not necessarily match changes across the futures curve.
  • Daily leverage, rebalancing, and tracking error affect outcomes and do not remove the risk of severe losses.

Tags

VolatilityFuturesRisk managementUS markets
Full text
# How did the SVXY ETF (-1x VIX) survive a 115% jump in VIX?


# How did the SVXY ETF (-1x VIX) survive a 115% jump in VIX?












The SVXY ETF is a "-1x" short exposure to the VIX, rebalanced daily. Very importantly, it is an ETF, and not an ETN. As an ETF, its holdings are fully transparent and posted on the fund sponsor's website, consisting of cash and two short positions on VIX Futures (one on the front month, another on F2) adjusted to 30-day duration. Again, very different from an ETN where the sponsor may take arbitrary hedging positions "behind the scenes" to limit their tail event exposure.

How did such a simplistic structure survive the 115% VIX move of February 5th, 2018 without going insolvent? The ETF NAV should have gone to $0 or below, but instead it "only" lost 80%+ of its value.

Asking on the quant exchange on the assumption that there's some serious financial engineering involved.

## Answer by He Shiming (score 5, accepted)

https://quant.stackexchange.com/a/38150

The CBOE VIX index is an aggregated spot value calculated from options. The index itself cannot be traded. Volatility ETPs are usually designed to track an underlying index on VIX Futures that is tradeable.

In the case of SVXY, it is stated in their prospectus that it tracks The S&P 500 VIX Short-Term Futures Index. Credit Suisse's XIV follows the exact same approach. You are right about holding two future contracts proportionally to their expiry, rebalancing on a daily basis.

On Feb 5, 2018, the index (which reflects futures contract value) jumped from 56.28 to 110.37, or 96.1%, leaving the fund less than 4% in indicative value. That is close to, but still not exactly 100%.

Having said that, if the jump were 100%, I believe the indicative value will fall to zero, as designed. Plus, tracking error during volatile times can cause the indicative value to wobble around 4%, but not by much (since rebalancing time is typically at the end of the session).

I don't believe they "hedge" to maintain some value in the fund. According to their prospectus and reports, they do hold the short side of VIX futures.

## Answer by op88 (score 1)

https://quant.stackexchange.com/a/38099

If there has been a 115% increase in VIX*, and not 115% 'drop' in the ETF, it is just because the 115% increase in VIX today, doesn't equate 115% increase in market expectation of where VIX is going to be in a month time. So if they are using futures to short the VIX, which they must be, then, somewhat understandably, market didn't just decide that VIX's sudden increase should lift the whole futures curve proportionally.

*which, by the way, is not really the right way to think about VIX moves, VIX is a vol measure and already in percentage terms

## Answer by Bram (score 0)

https://quant.stackexchange.com/a/38121

See this paper for an explanation why a leveraged ETF doesn't exactly produce returns that are equal to their leverage factor and the extent to which performance is path dependent:

http://epubs.siam.org/doi/abs/10.1137/090760805

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.