• Patrick Ling

Time To Replace VXX With VIXY Permanently

VXX used to be a very popular volatility instrument used by retail traders for long volatility trades. However, on 14th March 2022, the issuer Barclays announced that it had suspended any further sales and issuances of VXX, with immediate effect. I've written about the implications of this in an earlier post.


Important Update on VXX


The Slow Demise


VXX began to lose AUM ever since the announcement but amazingly it took a very long time before another similar ETF overtook its place. This other ETF is VIXY. VIXY has always been a better instrument to use compared to VXX because it doesn't bear any credit risk on the issuer, unlike VXX. However, for reasons unknown to me, VXX had always been more popular than VIXY by far. This resulted in much better liquidity in VXX as compared to VIXY. Hence, VXX was a better instrument to trade with the benefits of liquidity, narrow spreads, less slippage, and so on.


The Rise of Another


All that is in the past. VIXY has just overtaken VXX in terms of AUM.


VXX and VIXY AUM
Source: ycharts.com

What this means is that going forward, we should expect VIXY to have better liquidity especially if it can continue to grow its AUM to the billion-dollar mark. With this, the only weakness that is stopping volatility traders from trading VIXY is gone. It is time to replace VXX with VIXY permanently.


Hard to Let Go?


For those who find it hard to let go of VXX, do note that there is still a sizable gap between VXX and fair value as represented by VIXY.


VXX and VIXY price gap
VXX trading at a significant premium above fair value

This gap is a Damocles sword that is hanging over the heads of anyone that is holding it because the gap can be filled in an instant the moment Barclays starts re-issuing new units of VXX. Even if the current situation carries on indefinitely, VXX can experience sudden big drops just like yesterday when VIXY was down only 1.71% but VXX slumped 5.09%.

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