Is This a Good Time to Buy an XIV ETF?
As a Retail Investor, Here’s What You Need to Know
As a retail investor who engages in positional trades every quarter, it's crucial to maintain a strategic approach when it comes to buying and selling financial instruments like the XIV ETF. Using tools such as DigiFundManager, I compute the optimal portfolios of long and short positions to quantify expectations and mitigate potential drawdowns.
Understanding that an ETF is designed to track the market or a specific part of it, it's important to be aware of the amplified market dynamics associated with the VIX (Volatility Index). For many investors like myself, the high volatility and risk associated with the VIX make it unsuitable for long-term investment strategies. It's essential to backtest strategies during volatile periods, such as the current one, to prepare for the uncertainties that lie ahead.
Current Market Outlook and VIX Dynamics
As of April 17th, while the equity markets are expected to experience another dip weeks to months from now, factors like Federal Reserve policies and Trump's easing of social distancing measures could create a temporary floor on the markets. This could lead to a reduction or flat VIX levels for the coming days to weeks.
Given this, the implication is that volatility may decrease, which could mean that XIV, an ETF designed to track the inverse volatility of the SP 500, may not perform as expected. In essence, you might be long volatility, a position that could be risky if market volatility decreases.
Positioning for the Future
Considering the current state of affairs, it's not advisable to take positions in XIV unless you're willing to face the risks associated with a dramatically volatile market. The XIV ETF, particularly, has faced significant challenges in recent years. On Monday, following a market close, XIV dropped by 85%, triggering the termination event as outlined in its prospectus.
The sudden movement in the VIX led to a rebalancing issue within the ETF, causing a spike in VIX futures prices during the after-hours (AH) trading. On February 20th, holders were informed of the termination event and would be paid the termination value based on the value as of February 15th. While technically, the ETF continues to trade, it is effectively a 'dead man walking,' as it is no longer a viable investment option.
For long-term investors with a strategic perspective, concerns over ETFS that face such significant changes make it a risky proposition. The ability to accurately time the market is often elusive, and strategies that rely on such precise timing can be fraught with challenges.
Conclusion
Given the current conditions and the ongoing uncertainties in the market, it is not advisable to invest in an ETF like XIV unless you understand and are prepared to manage the associated risks. Instead, focusing on equities and bonds with a long-term perspective might provide a more stable and sustainable investment strategy.
By staying informed and making thoughtful choices based on thorough analysis, retail investors can navigate the volatile market environment more effectively and achieve their investment goals.