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Why VXX’s Price Differs from Its VIX Futures Basket

Article Quant Q&A · Author: MMagique
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Summary

The document explains why VXX’s quoted level need not equal a weighted average of nearby VIX futures, even though its returns are designed to reflect an index based on a rolling futures position. The central distinction is between an investment’s price level and its change in value: the fund’s share price has its own starting value, while the index relationship concerns returns over time.

A second answer notes that VXX is an exchange-traded note issued as unsecured debt, rather than a fund holding the futures. Because investors cannot create notes directly, the usual creation-and-redemption mechanism that supports index arbitrage does not keep its market price equal to the basket’s value. The answers offer conceptual explanations, not a detailed pricing model or analysis of premiums and discounts. One reply attributes the discrepancy to contango, but gives no supporting detail; the document therefore does not establish contango alone as the explanation.

Key ideas

  • VXX’s price level is not expected to equal the level of its underlying futures index.
  • The intended relationship concerns changes in value, or returns, over time.
  • VXX is an unsecured note, so owning it does not mean owning the index components.
  • The lack of direct investor creation can weaken the arbitrage link between the note and its reference futures basket.

Tags

VolatilityFuturesDerivatives pricingArbitrage
Full text
# Why is the value of the VXX ETN always above short-term VIX futures prices?


# Why is the value of the VXX ETN always above short-term VIX futures prices?












If the VXX is simply a constant maturity weighted average of the 1st and 2nd month VIX futures prices, then why is its market price always larger than the maximum of the two? (the larger of the two is the 2nd month if in contango). I would expect it to always sit somewhere between the 1st and 2nd month prices.

For example, today at time of writing I observe the following prices:

Nov 17th VIX future (15 days to expiry) : 16.10

Dec 15th VIX future (43 days to expiry) : 17.00

VXX : 18.49

I would expect the VXX right now to be roughly the average of the two, i.e 16.55. What is wrong with my reasoning here?

## Answer by Escachator (score 3, accepted)

https://quant.stackexchange.com/a/21573

The price of VXX ETF should not be the price of the mentioned basket of VIX futures. It is the change in price of VXX (the return) what should be equivalent to the change of price of the futures basket with 1 month average maturity.

That is because the VXX ETF works as an open end fund, so its price is just the price of a share of that fund, which has an arbitrary value set at the inception of the fund. When you buy a share of the fund, the change in value of that share will be representative of the change of value of the basket that is inside the fund.

Look to the historical prices of VXX for a very long term and you will see that it doesn't match the futures. But look to the returns and you will see they match.

## Answer by LazyCat (score 0)

https://quant.stackexchange.com/a/21576

I'll write it up as a separate answer, though it may be what AlexC actually meant in his comment. VXX is an ETN, not an ETF, so when you buy a share of VXX, you are not buying a share in its holdings, like it is the case for ETFs (from VXX prospectus: "Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index"). It's more like buying a bond from Barclays, though they put it differently - again, VXX prospectus: "the ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC". This has implications for tracking the corresponding index (defined by VIX futures). The main one is that you cannot create new shares of VXX, only Barclays can. Therefore, there is no "index arbitrage", that would keep VXX price same as the weighted sum of the futures contract. (prospectus: http://www.ipathetn.com/US/16/en/details.app?instrumentId=259118)

## Answer by SpzToid (score -2)

https://quant.stackexchange.com/a/21560

The reason is known as "Contango"

See this article for a more detailed explanation

VXX: Contango and Cash

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.