BetaPro S&P 500 VIX Short-Term Futures™ Daily Inverse ETF (HVI Explained).

Units of the BetaPro S&P 500 VIX Short-Term Futures™ Daily Inverse ETF (or HVI) trade on the stock exchange until 4 p.m. EST. HVI’s underlying index is the Horizons Short VIX Short-term Futures Index (or CMDYVXER), which is essentially the inverse of the S&P 500 VIX Short-Term Futures Index™ (or SPVXSP) (a theoretical rolling futures contract index). SPVXSP trades up until 4:15 p.m. each day and strikes its end of day level based on a weighted average of the 4:15 p.m. close of the applicable one and two-month futures contracts.

HVI’s net asset value (NAV) however, is based on the custom index, CMDYVXER which uses an approximate 4 p.m. value of the SPVXSP index. CMDYVXER does not use the 4:15 p.m. prices of the underlying reference futures contract’s close. The closing value of CMDYVXER is posted each day on Bloomberg and it is not priced intra-day.

The SPVXSP index (Bloomberg: SPVXSPID) can be followed intra-day, but it is important to note that it is an estimate only and the approximate 4 p.m. spot price one could see does not necessarily track well with the underlying futures contracts at that time due to several reasons. These include time lag, wide bid-offer spreads on the futures, theoretical roll execution of the futures, and the significant time value decay/contango loss that is inherent in the VIX futures contracts.

Additionally, it has proven to be very difficult to monitor the day-over-day change of the underlying futures contracts of SPVXSP or SPVXSP itself and expect HVI to accurately replicate the inverse of this change. This is because both the SPVXSP and the futures are based off the futures close at 4:15 p.m. as their starting point for the change, whereas HVI uses 4 p.m. The underlying futures contracts, and therefore SPVXSP, can move significantly between 4 p.m. and 4:15 p.m. Recently, we have seen moves of close to 10% in that short 15 minute time frame.

We receive inquiries from investors who question HVI’s daily inverse tracking to changes in volatility, in particular, because these investors are looking at the change day-over-day of the underlying futures contracts (or SPVXSP Index) from the previous close which uses the 4:15 p.m. close, and this is an incorrect comparison. If HVI traded up to 4:15 p.m. when the underlying VIX futures closed, it would have a next day starting value that would be comparable to those underlying futures contracts and SPVXSP, but that is not the case.

Assuming units of HVI and the BetaPro S&P 500 VIX Short-Term Futures™ ETF (or HUV) each trade up to or at 4 p.m. when the market closes, you generally experience a close negative correlation between these two ETF’s performance. The historical daily trading return correlation between HUV and HVI, for the period April 5, 2012 to August 26, 2015, based off their closing prices, is -0.949. It is important to note that HUV and HVI do not always trade right up until 4 p.m. and one can often end the trading session at a premium while the other closes at a discount. These premiums and discounts will typically reverse themselves intra-day during the next day as they trade.

So how does an investor assess HVI’s tracking intra-day?

Since there are no published/live quotes that follow the 4 p.m. to current percentage return change in the underlying futures contracts (or SPVXSP index), it is extremely difficult to calculate or visualize the intra-day movements of HVI. When we calculate the correlation of HVI’s NAV to the CMDYVXER index, it is extremely accurate. When we calculate the correlation of CMDYVXER to other live quoted products, there are two reasonably accurate proxies for HVI which trade actively.

First is the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN (or VXX), to which HVI has had a greater than -0.996 historical daily trading return correlation for the period April 5, 2012 to August 26, 2015. The other is the ProShares Short VIX Short-Term Futures Index ETF (or SVXY) to which CMDYVXER has had a greater than 0.999 historical daily trading return correlation over the same period. If you look at the historical trading price correlation of VXX versus SVXY it is close to -0.993 over the same period.

If VXX, for example, on a day-over-day basis, is trading up 5% then HVI should typically be trading down approximately 5%. And if SVXY, on a day-over-day basis, is trading down by 5% then HVI should also be trading down by approximately 5%.

These proxies (VXX and SVXY) do not take into account premiums or discounts which could occur with them or with HVI and which should always be adjusted for, as applicable, when looking at the day-over-day change. If you go to the Prices and Performance page – BetaPro, you will see if HVI closed at a premium or discount relative to the 4 p.m. spot price of the CMDYVXER index. This should be adjusted for in any calculation where one is looking at the next day in comparing the performance of HVI.

If HVI, for example, traded at 4 p.m. and closed at a 2% premium to its NAV the previous night and the VXX, on a day-over-day basis, is trading down 5% then HVI should typically be trading up by approximately 3%.

It is important to understand that in fast-moving, volatile markets, spreads widen, liquidity can become challenging and all ETFs that track volatility in some form will experience times when they are not trading at their theoretical fair value which can result in tracking error.

Download PDF

Share This Article

Official Partner of the Toronto Raptors

“Toronto Raptors” and associated word marks and logos are trademarks, designs and other forms of intellectual property of NBA Properties, Inc. and the Toronto Raptors and are used under licence (or with permission) by Maple Leaf Sports & Entertainment Partnership © 2017 NBA Properties, Inc. All rights reserved.

Horizons ETFs is a Member of Mirae Asset Global Investments. Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products consist of the Horizons Index ETFs ("Index ETFs"), 2x Daily Bull and -2x Daily Bear ETFs ("2x Daily ETFs"), Inverse ETFs ("Inverse ETFs"), VIX ETFs (defined below) and active ETFs. The 2x Daily ETFs and certain other Horizons Exchange Traded Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These Horizons Exchange Traded Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, which, where applicable, are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or -200% of the performance of a specified underlying index, commodity or benchmark (the "Target") for a single day. Each Index ETF or Inverse ETF seeks a return that is 100% or -100%, respectively, of the performance of a Target. Due to the compounding of daily returns, a 2x Daily ETF's or Inverse ETF's returns over periods other than one day will likely differ in amount and possibly direction from the performance of their respective Target(s) for the same period. The Horizons Exchange Traded Products whose Target is the S&P 500 VIX Short-Term Futures Index™ (the "VIX ETFs"), one of which is a 2x Daily ETF and one of which is an Index ETF, as described in their prospectus, are speculative investment tools that are not conventional investments. The VIX ETFs' Target is highly volatile. As a result, the VIX ETFs are not generally viewed as stand-alone long-term investments. Historically, the VIX ETFs' Target has tended to revert to a historical mean. As a result, the performance of the VIX ETFs' Target is expected to be negative over the longer term and neither the VIX ETFs nor their Target are expected to have positive long term performance. Investors should monitor their holdings, as frequently as daily, to ensure that they remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.