On July 25, 2015, I explained why the iPath® S&P 500 VIX Short-Term Futures ETN (VXX), which is an exchange-traded note, was destined to fail. This poorly constructed ETF is the worst investment that I have ever seen. The last line in my post was, “I’m just informing you that there will be a story one day on 60 Minutes about a few guys that bought an island from shorting this ETF.”
The VXX began trading on January 30, 2009, and it is down over an astounding 99.65%. It has had a 58% annual loss, which works out to an average loss of almost 7% per month. The VXX ETF has even dropped another 50% since the time of my post.
A few weeks ago, I participated on a conference call with the VXX Portfolio Manager, Head of Sales, and VP of the Chicago Board of Options Exchange. I was fascinated to learn that they viewed this product as purely insurance. You pay a premium to own it, and if nothing happens, you will lose money. This product is designed to help protect your portfolio from some losses in the event of a shock to the system.
I don’t think it was a coincidence that the timing of this call coincided with the presidential race. As the polls have tightened, the price of this ETF has risen 25% since Oct 24th. Investors are fearful. Another popular indicator that gauges investor fear is the market’s put-call ratio, and it’s at the highest level since the market crashed 15% at the beginning of the year. As the election nears, all the buyers have disappeared. The S&P 500 wrapped up the week by posting it’s longest losing streak in 36 years (nine consecutive days of losses).
I expect that the VXX ETF to spike higher if Trump wins the election on Tuesday. The insurance will finally payoff. If Hillary wins, the VXX ETF insurance will once again become worthless. If you are anxious about the looming election, there is one quote that can help give you some peace of mind no matter your political affiliation. It comes from Warren Buffett’s mentor, Benjamin Graham.
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
In the short run, the market is hoping for a Hillary victory but it’s the long run that matters. If a clear winner emerges on Tuesday night, the VXX ETF is indicating that the build up will result in either panic selling or a sharp increase in prices. A Hillary victory will see the VXX ETF collapse in price and markets will stage a relief rally. In the event of a Trump victory, there will be short-term losses, but it will be the weighing machine that matters over the months and years ahead.
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