S&P Forgot to Update the XIV Index

Credit Suisse Group AG used to have a product called XIV, the VelocityShares Daily Inverse VIX Short-Term ETN, an exchange-traded note that you could buy to bet against volatility. Loosely speaking, XIV gave you the daily inverse of VIX, the CBOE Volatility Index: If the VIX went up by 5% in a day, you lost 5% of your money; if it went down by 10% in a day, you added 10% to your money. One day — Monday, Feb. 5, 2018 — the VIX went up by 115.6%, from 17.3 the previous Friday to 37.3 that day.1 So XIV investors lost all their money that day, and XIV doesn’t exist anymore. Fine!?

But that was an oversimplified description of how XIV works. Actually it tracked, not the actual VIX, but changes in an index of near-term futures contracts on the VIX. The reason for this is that Credit Suisse, the issuer of the exchange-traded note, had to hedge its exposure: If VIX went down, Credit Suisse owed XIV holders more money. It could hedge that risk by being short VIX futures: If VIX went down, it would make more money on the futures. Because futures expire, it had to roll those futures over — short some next-month futures and then, as their expiration approaches, close some of them out and short some following-month futures — and there is an index that mechanically tracks that strategy, basically a weighted average of the prices of the next couple of months of VIX futures, with the weighting changing as one future gets closer to expiration. The index is called the S&P 500 VIX Short-Term Futures Index ER; you can read how it’s calculated here. S&P Dow Jones Indices LLC, the index provider, looks at the prices of VIX futures, plugs them into a formula, and calculates the level of the index from the futures prices.