With current volatility exceeding 40, it seemed like a good idea to short the VIX. Two very popular ways to do this is either to short VXX or go long XIV. I choose to go long XIV a couple of days ago, after making sure that it tracks the inverse daily return of VXX.
Now a strange thing has happened that both puzzles me and pisses me off: yesterday there was a tracking error of 2% between the two and today another 1%, both in my disadvantage. It seemed like somebody 'stole' 3% of my position! At this moment I am less than happy with this XIV product.
Take a look at this chart:
Here I plotted daily returns of VXX and XIV against each other, where the outliers have been plotted in red. Please note that there are another 2 outliers of similar magnitude, occuring on 4 and 5 January 2011, but these two cancel each other out pretty nicely.
I thought that both etfs were based on the same SPVXSTR index, but while their intraday path relative to each other is very stable (no arbitrage possibilities), the tracking offset was present throughout the whole day.
I understand that XIV could get a positive tracking error because it was banned from short selling on both days (just like VXX), but a negative tracking error is a mystery to me.
Can someone shed a light on what is going on here???