SVXY: Buy Volatility After A -40% Drawdown

seekingalpha08-08

DNY59 Thesis The last few days have been interesting to say the least. Monday, August 5, 2024, opened with one of the highest levels on record for the VIX index, namely at a level over 60: ...

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Monday, August 5, 2024, opened with one of the highest levels on record for the VIX index, namely at a level over 60:   ...</p>\n\n<a href=\"https://seekingalpha.com/article/4711906-svxy-buy-volatility-after-a-minus-40-percent-drawdown\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SVXY: Buy Volatility After A -40% Drawdown</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSVXY: Buy Volatility After A -40% Drawdown\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-08 11:23 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4711906-svxy-buy-volatility-after-a-minus-40-percent-drawdown><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>DNY59 Thesis The last few days have been interesting to say the least. Monday, August 5, 2024, opened with one of the highest levels on record for the VIX index, namely at a level over 60:   ...</p>\n\n<a href=\"https://seekingalpha.com/article/4711906-svxy-buy-volatility-after-a-minus-40-percent-drawdown\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"OEF","symbol_name":"标普100指数ETF-iShares","start_time":0,"source_url":"https://seekingalpha.com/article/4711906-svxy-buy-volatility-after-a-minus-40-percent-drawdown","article_id":"2457326703","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1391973547/image_1391973547.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2457326703","pubTimestamp":1723087417,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"DNY59 Thesis The last few days have been interesting to say the least. 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Monday, August 5, 2024, opened with one of the highest levels on record for the VIX index, namely at a level over 60:   Volatility (Creative Planning) We have only seen figures this elevated during Covid in 2020, and during the Great Financial Crisis of 2008. There are many reasons behind the spike, but more importantly, a convergence of factors caused a market wide scare over the weekend. The fear caused the unwind of the yen carry trade, thus creating the 'perfect storm'. While a spike this large is very rare, a move to a higher volatility environment was not unexpected. The market has been extremely calm and complacent in the past year, with the advent of volatility selling funds, which monetized the upward move in stocks via bets of continued low vol. When large pockets of the market try to unwind the same trade, unusual events tend to happen, and more importantly, large losses for certain instruments occur. In this article, we are going to discuss the ProShares Short VIX Short-Term Futures ETF (BATS:SVXY), its large -40% drawdown this week, and our view on this ETF as part of a 'short vol' cohort of funds. What does SVXY Composition change actually do Let us start with the ETF's stated objective: ProShares Short VIX Short-Term Futures ETF seeks daily investment results, before fees and expenses, that correspond to one-half the inverse (-0.5x) of the daily performance of the S&P 500 VIX Short-Term Futures Index. It is very important to remember two things here:  the ETF is based on the S&P 500 VIX Short-Term Futures Index the fund aims to provide half the inverse performance of the index  To translate the above in English, if VIX futures move lower the ETF gains, whereas instances of spikes in VIX futures cause significant loses to the ETF. Let us see next how the Index is built: The S&P 500® VIX Short-Term Futures Index utilizes prices of the next two near-term VIX® futures contracts to replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts. This results in a constant one-month rolling long position in first and second month VIX futures contracts. The Index consists of long positions in the two front end futures contracts on the VIX. This approach dampens spikes to a certain extent, since spot prices will always be more volatile than a curve approach. We can see that by benchmarking SVXY with the VIX in the past month: Data by YCharts In the past month, the VIX has moved up by 80%, while SVXY has moved down by only -26%. If the two front end futures contracts moved exactly the same as the VIX we would have expected a -40% move in SVXY (remember it aims to provide a -0.5x move). The futures contracts, however, did not move as much, thus dampening the effect of the VIX spike. This fund build favors SVXY from a drawdown perspective, since it avoids complete wipe-outs in terms of black swan events. Composition change Kindly note that SVXY has been in the market for nearly a decade, and changed its composition after a 'near death' event in 2018 when it was nearly wiped out following a spike in the VIX. Prior to the composition change, the fund represented a -1x exposure to the front month end contract, thus having much more volatility. After a VIX spike that almost wiped out the ETF, its financial composition was changed to avoid another collapse. As we saw this week, the current approach works very well, where a black swan event in the VIX caused a -40% drawdown only, with the ETF down a modest -16% for the year. The 'short vol' ETF cohort There are a number of ETFs which fall in the 'short vol' cohort, but we are going to compare SVXY to the largest two others: Data by YCharts The utilized cohort consists of the -1x Short VIX Futures ETF (SVIX) and the Simplify Volatility Premium ETF (SVOL). While we have not reviewed the above funds in detail, SVIX is a -1x take on front month VIX futures, while SVOL is a more complex fund that has assets layered in outside of volatility (volatility which itself is hedged via a term structure). The results in the past year, however, speak volumes. SVIX is the most volatile of the cohort, with SVOL the least volatile, and still positive on a year to date basis when looking at its total return. SVXY falls somewhere in the middle, with the fund posting outstanding results when volatility is low, while its drawdowns are not cataclysmic. Let us widen out the historical period used for our total return analysis: Data by YCharts Since March 2022, SVXY and SVIX have posted a similar total return, albeit with a massive volatility, when looking at SVIX. SVOL, on the other hand, has been more subdued, basically following the S&P 500 total return to a large extent. As an investor, you need to acknowledge the robustness of SVXY here. The fund is a short vol fund which just went through one of the worst VIX days in the past twenty years, yet is still up significantly on a three year look-back. The roll-down in futures is pretty clear to all investors in a calm market, but let us zoom in the performance during 2022, when we actually had a bear market in equities, and a volatility environment which saw the VIX alternate between 20 and 30: Data by YCharts During the 2022 bear market, SVXY was actually roughly flat for the year, with a low -15% drawdown. The above theme persists during 2022 as well, where SVOL is the least volatile one, while SVIX had a massive -30% drawdown. Understand the market environment and the fund SVXY has proven itself as a robust tool during calm times as well as during run-off the mill bear markets like 2022. When volatility moves up, SVXY loses value, but eventually the fund catches up as front month futures roll in the new higher level volatility environment. In these two market environments, the fund does its job - providing outsized returns in calm markets and normalized drawdowns in 'normal' bear markets. However, an investor needs to remember this is a short position on vol futures; thus sudden losses are not going to experience a 'V' shaped recovery when VIX normalizes. Just look at the current price for SVXY in the context of the VIX - as we are writing this article the VIX has moved to below 24, yet SVXY is very far off its price from last week: Data by YCharts Even if the VIX moves to 15 tomorrow, do not expect SVXY to move to its prior price of $60/share. The ETF makes money in time, due to the decay and the futures 'roll' effect. Primary risk factor for SVXY We just experienced the primary risk factor for the ETF, namely a sudden spike in the VIX. The fund does fine in an environment where volatility moves gently higher, but experiences a loss when there are spikes in volatility, just like on August 5, 2024. By definition, the VIX cannot stay very elevated (above 35) for long periods of time because the capital markets will stop functioning. Therefore, SVXY is subject to sudden significant losses only in distinct events, low probability events just like we experienced. As the VIX curve normalizes (even at a higher level), the ETF will make money from the roll effect. Therefore, the best time to purchase SVXY is right after such an outsized spike because the market dynamics are set to flatten the vol futures curve eventually (even if at a higher level). SVXY will make money even if the VIX trades at above 20 levels going forward. The crux for the fund is the lack of other massive spikes in the VIX, which would dent the ETF NAV. Conclusion SVXY is a short volatility exchange-traded fund. The fund aims to provide a -0.5x return against the daily performance of the S&P 500 VIX Short-Term Futures Index, an index which is composed of the two front month VIX futures contracts. The ETF has negative performances when the VIX spikes suddenly, while gentle moves higher are absorbed via modest drawdowns. We saw this financial engineering embedded in the fund's performance in 2022 when it was roughly flat during a bear market year. SVXY experiences deep drawdown only when the VIX spikes unexpectedly, just like it did on Monday, August 5, 2024. The ETF experienced a -40% drawdown following this event, but is down only -16% for 2024. As the VIX normalizes (or better said does not experience spikes), the ETF is going to grind higher. Absent an environment of constant VIX spikes, the ETF is a 'Buy' following such a black swan event since it will benefit from the volatility level normalization, even if the VIX remains above 20 going forward.  A retail investor considering a soft landing as a base case should find SVXY attractive, since its drawdown was the result of a confluence of fear factors which should not repeat themselves. Even a mild bear market should see the fund do well as long as the VIX grinds higher in a steady fashion rather than via spikes. Do not expect a 'V' shaped recovery in the SVXY price even if the VIX moves back to 15 tomorrow, but do expect a slow grind higher on the back of a normalization in volatility.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2457326703"}