From a column from Stansberry Digest
A couple years ago, I downloaded all the VIX’s closing-price data since its inception in the early 1990s…
I discovered that the long-term average was around 19… but the long-term “modal value” – the value that appears most often – was about 12. In other words, the VIX spends more time at about 12 than any other value.
For a brief time, I tried to use this information to trade VIX futures… I roughly broke even. But more important, I learned a lot about these futures, which I’ll never touch again.
You see, VIX futures are defective. They simply don’t work.
The nearest-term contract (called the “front month”) should roughly reflect any moves in the VIX. But when the VIX soars, this contract doesn’t rise nearly as much as the VIX itself… If the VIX doubles or triples, you’re lucky to get a 50% move higher from the front month. And it’s worse for the second month, the third month, and all the other months.
This disconnect happens because there’s no real tie between the futures and the VIX. There’s no deliverable VIX commodity… like you have with gold, pork bellies, wheat, or Malaysian palm oil.
VIX-related exchange-traded funds (“ETFs”) are based on futures, so they perform poorly, too. These ETFs are some of the worst garbage securities on the market…
Some VIX-related ETFs are debt-based, meaning buyers basically lend money to investment bank Barclays or another big institution… with zero promise to get repaid… and zero interest payments along the way. That sounds like a pretty good deal for Barclays!
Now, I want you to look at a long-term chart for one of these VIX-related ETFs…
The iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) is the biggest VIX-related exchange-traded product. VXX has about $878 million in net assets today. (“ETN” stands for exchange-traded note, which just means it’s debt, not equity like an ETF.) Take a look…
As you can see, the chart looks a lot like a ski slope, falling from the left to the right… a record of endless value destruction. To me, VXX – and all the other VIX-related ETFs – is nothing more than a legal scam to separate unknowing investors from their money.
You shouldn’t get all technical with trading VIX futures. Instead, there’s a much better – and safer – way for investors to “buy volatility” and profit from rising fear in the markets…
Hold plenty of cash and own some gold.
In a serious equity rout – which almost nobody is predicting right now – those two assets should treat you well. They’ll protect your wealth… and allow you to take advantage of all the countless cheap opportunities that arise when other investors have been wiped out.
