How can this apparent breakdown between longer term index returns and ETF returns happen? Here’s a hypothetical example: let’s say that on Day 1, an index starts with a value of 100 and a leveraged ETF that seeks to double the return of the index starts at $100. If the index drops by 10 points on Day 1, it has a 10 percent loss and a resulting value of 90. Assuming it achieved its stated objective, the leveraged ETF would therefore drop 20 percent on that day and have an ending value of $80. On Day 2, if the index rises 10 percent, the index value increases to 99. For the ETF, its value for Day 2 would rise by 20 percent, which means the ETF would have a value of $96. On both days, the leveraged ETF did exactly what it was supposed to do – it produced daily returns that were two times the daily index returns. But let’s look at the results over the 2 day period: the index lost 1 percent (it fell from 100 to 99) while the 2x leveraged ETF lost 4 percent (it fell from $100 to $96). That means that over the two day period, the ETF’s negative returns were 4 times as much as the two-day return of the index instead of 2 times the return.
I think it’s not so much the height of the spike that did it that time, but that combined with how low the VIX was just before that spike. Inverse ETFs are strange beasts. There’s no hard limit to the upside of what they’re tracking, but the inverse ETF can’t drop below zero, and this is a good thing compared to shorting the underlying yourself, since it caps your losses. For daily-tracking inverse ETFs with 1x leverage, a one-day move of the underlying of 100% of its previous day’s value would mean a total wipeout. For a 2x inverse ETF, it would only take a 50% move. Also remember that SVXY trades short-term VIX futures, not the VIX itself, which is just an index formula and can’t be traded directly. The February futures went from about 16 in the morning to over 30 in the afternoon on February 5th, 2018. A similar ETF, XIV, gave up and liquidated itself at the same time.
SVXY is a great investment. In small amounts—small enough that you could tolerate it dropping to zero overnight, which could really happen someday! Leverage down!
[Obligatory disclaimer: I currently have a small SVXY position. I usually do.]
What. In. The. World. Happened. In. 2018.
SVXY falling off the cliff looks like it was associated with a spike in VIX, but why didn’t the previous, bigger spikes have the same effect, sooner?
[ETA]: “For example, SVXY was crushed in the volatility run-up of 2018. The instrument has since reduced leverage to half exposure...” That may explain the shift in behavior since 2018, but not what happened leading up to it. Altho perhaps that might be sufficiently explained by the counter-intuitive behavior of leveraged/inverse ETFs—this page on the SEC’s site actually has a surprisingly good explain-it-like-I’m-twelve:
Still. Curious.
I think it’s not so much the height of the spike that did it that time, but that combined with how low the VIX was just before that spike. Inverse ETFs are strange beasts. There’s no hard limit to the upside of what they’re tracking, but the inverse ETF can’t drop below zero, and this is a good thing compared to shorting the underlying yourself, since it caps your losses. For daily-tracking inverse ETFs with 1x leverage, a one-day move of the underlying of 100% of its previous day’s value would mean a total wipeout. For a 2x inverse ETF, it would only take a 50% move. Also remember that SVXY trades short-term VIX futures, not the VIX itself, which is just an index formula and can’t be traded directly. The February futures went from about 16 in the morning to over 30 in the afternoon on February 5th, 2018. A similar ETF, XIV, gave up and liquidated itself at the same time.
SVXY is a great investment. In small amounts—small enough that you could tolerate it dropping to zero overnight, which could really happen someday! Leverage down!
[Obligatory disclaimer: I currently have a small SVXY position. I usually do.]