VIX vs. VXX Correlation

VIX vs. VXX Correlation

The VXX is an ETN designed to track VIX futures. Investing in VXX is essentially equivalent to exposure to daily rolling long position in the first and second month VIX futures contracts. An investment represents the implied volatility of the S&P 500 at various points along the volatility forward curve. What is the relationship between VXX and VIX?

Basically, VXX is not meant to track VIX, it is designed to track VIX futures, WHICH IS NOT THE SAME!

Further analysis suggests that historically VXX captures about 50% of the daily move in the VIX (although YTD=85%, most likely due to record high implied correlations), largely explained by mean reversion. Theoretically, the VIX index should outperform during a rally because traders will NOT anticipate the VIX to be higher in 30 days. Therefore, the VXX would underperform and get crushed. The opposite would be true in bear markets.

In summary, to say that VXX is a terrible ETN would be inaccurate, there is no mispricing between the two entities. VXX will perform worse than the VIX under the conditions that the market anticipates lower volatility in the future. Unless you are a futures trader, the best way to hedge may simply be buying SPY puts or put spreads. Looking at the metric from a total return basis, we can see the lack of support