As most of you know, leveraged fund tend to degrade over time, unless there is a persistent trend in the desired direction of the fund. If the S&P goes up, let’s say, 10% in a given year, the double-bearish fund against the S&P doesn’t go down 20%. It may be down 50% (possibly) depending on how crazy the ride was. I think one of the craziest ones of all is UVXY, which is the ultrashort against voatility.
The graph looks pretty smooth, but it conceals just how jaw-dropping the plunge has been over the long haul. As I’m typing this, the quote on UVXY is $11.94. And what was this financial instrument priced at when it came public one decade ago?
Yep. From about $2.5 billion to twelve bucks. Of course, no sane person holds this thing more than a few days, but I think this is an extraordinarily poignant example of the power of leverage (and how ETFs can be constructed to persistently head toward $0).
The VIX itself, of course, isn’t quite that horrific. On the contrary, we’re nestled comfortably above the ascending, supportive trendline, and as bullish as everything might seem on this January 3rd, I wouldn’t be surprised to see a big up-move on the VIX before February is over.