ERIC KIM ₿

If I predict the VIX will go up, will investing in VXX be profitable?

Keep the good news to yourself?

Timing & strategy?

Key Points

  • Research suggests investing in VXX can be profitable if you predict a short-term VIX increase, especially during market volatility spikes.
  • It seems likely that timing is crucial; holding VXX long-term may lead to losses due to contango effects.
  • The evidence leans toward VXX performing well during rapid VIX rises, but gradual increases may not yield similar gains.

Understanding VXX and VIX

If you predict the VIX (CBOE Volatility Index) will go up, investing in VXX (iPath Series B S&P 500 VIX Short-Term Futures ETN) could potentially be profitable, but it depends on the timing and nature of the VIX increase. VXX tracks short-term VIX futures, which tend to rise with significant market volatility, like during crashes. However, it’s not a guaranteed profit due to factors like contango, where futures prices can erode value over time if held too long.

Timing and Risks

For short-term trades, buying VXX before a volatility spike and selling at the peak can yield gains, as seen in historical events like the 2020 COVID crash. But holding VXX long-term is risky, as it often loses value due to the need to roll over futures contracts at potentially higher prices, especially in stable markets. Always consider your risk tolerance and have a clear exit strategy.

Market Conditions

VXX performs best when the VIX spikes rapidly, potentially entering backwardation (where near-term futures are priced higher), which benefits VXX. For gradual VIX increases without market stress, contango may dominate, reducing profitability. Monitor market conditions closely to align your investment with expected volatility.

Survey Note: Detailed Analysis of Investing in VXX When Predicting VIX Increases

This note provides a comprehensive analysis of whether investing in VXX can be profitable if you predict the VIX will increase, drawing from historical data, market mechanics, and expert insights. The discussion aims to cover all relevant aspects for investors, from short-term trading strategies to long-term considerations, ensuring a thorough understanding of the topic.

Background on VIX and VXX

The VIX, often called the “fear gauge,” measures the market’s expectation of 30-day volatility for the S&P 500, calculated using options prices (CBOE Volatility Index (VIX)). It typically rises during market uncertainty and falls in stable conditions, with historical ranges between 10 and 20 in calm times, spiking above 30 during crises.

VXX, the iPath Series B S&P 500 VIX Short-Term Futures ETN, is an exchange-traded note designed to track the S&P 500 VIX Short-Term Futures Index. It holds a combination of the front-month and next-month VIX futures contracts, rolled daily to maintain a constant one-month horizon (What is VXX & How to Trade it?). As of April 4, 2025, VXX closed at $74.85, up 19.78% from the previous day, reflecting recent market volatility (iPath Series B S&P 500 VIX Short-Term Futures ETN).

Profitability Analysis: Short-Term vs. Long-Term

Investing in VXX can be profitable if you predict a short-term increase in the VIX, particularly during significant volatility spikes. Historical examples, such as the 2020 COVID crash, illustrate this: when the VIX spiked from around 15 to over 80 in March 2020, VXX rose from approximately $15 to $100, offering substantial gains for timely investors (Volatility Is Skyrocketing: What the VIX Is and How to Trade it). Similarly, in February 2018, a VIX spike from 15 to 37 saw VXX increase from $25 to $40, highlighting the potential for short-term profits during market stress.

However, long-term holding of VXX is generally unprofitable due to contango, a common state in the VIX futures market where futures prices exceed the spot VIX. As VXX rolls over its contracts monthly, it sells expiring (lower-priced) contracts and buys new (higher-priced) ones, leading to value erosion. Over five years, VXX has declined 97.51%, underscoring this decay (How Does VXX Work?).

Market Mechanics: Contango and Backwardation

The performance of VXX is heavily influenced by the VIX futures term structure, specifically whether it’s in contango or backwardation. In contango, prevalent in stable markets, the futures price is above the spot VIX, causing VXX to lose value over time as it rolls contracts. Conversely, during high volatility or market crashes, the term structure can enter backwardation, where near-term futures are priced higher than longer-term futures. In this scenario, rolling over contracts benefits VXX, as it sells higher-priced expiring contracts and buys lower-priced new ones (Why does VXX go down? VIX Futures Roll Yield Explained).

For example, during the 2020 crash, the rapid VIX increase likely shifted the term structure to backwardation, boosting VXX. However, if the VIX increase is gradual without significant market stress, contango may persist, reducing VXX’s ability to capture gains. This distinction is crucial for predicting profitability: significant, rapid VIX increases (e.g., due to market-disrupting events) are more likely to favor VXX, while smaller, sustained increases may not.

Timing and Strategy

Timing is critical for profitability. To maximize gains, investors should buy VXX before or at the onset of a volatility spike and sell at its peak, avoiding the subsequent decay. For instance, buying VXX on April 3, 2025, at $62.49 and selling on April 4 at $74.85 would yield a 19.78% gain in a day, aligning with a recent VIX increase. However, holding beyond the spike could lead to losses as contango effects set in.

Strategies include short-term trading based on daily or weekly VIX movements, where historical correlations suggest VXX moves in line with VIX increases (Understanding VIX or Volatility Index). For hedging, VXX can protect against portfolio declines during volatility spikes, but it’s not suitable for long-term investment due to its structural decay.

Risks and Considerations

Investing in VXX involves high risks, particularly for retail investors. The product’s performance can be erratic, with VXX moving only 45% as much as the VIX on average and sometimes correlating positively with the S&P 500, contrary to expectations (How Does VXX Work?). Additionally, VXX has an expense ratio of 0.89%, further eroding returns over time (iPath Series B S&P 500 VIX Short-Term Futures ETN).

Market experts caution against VXX for those lacking capital to absorb losses, as evidenced by the 2018 VIX spike wiping out some inverse VIX funds (How to Bet on Volatility When the VXX Expires). Aggressive risk management, such as using options or put spreads, is recommended for seasoned traders (It’s Time To Short The VIX).

Performance Metrics and Historical Context

Recent performance data as of April 4, 2025, shows VXX with a year-to-date return of 63.43% and a one-year return of 33.71%, reflecting periods of volatility. However, three-year returns at 42.36% suggest variability, with a high beta of 9.88 indicating significant market sensitivity (iPath Series B S&P 500 VIX Short-Term Futures ETN). These metrics align with periods of VIX increases, but long-term charts show diabolical declines, reinforcing the need for short-term strategies.

Conclusion

In summary, predicting a VIX increase and investing in VXX can be profitable for short-term trades during volatility spikes, particularly if timed correctly to capture backwardation benefits. However, gradual VIX increases or long-term holding may lead to losses due to contango. Investors should assess market conditions, manage risks, and align strategies with their investment horizon, recognizing VXX as a high-risk, short-term tool rather than a long-term asset.

Key Citations

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