PT - JOURNAL ARTICLE AU - Geng Deng AU - Craig McCann AU - Olivia Wang TI - Are VIX Futures ETPs Effective Hedges? AID - 10.3905/jii.2012.3.3.035 DP - 2012 Nov 30 TA - The Journal of Index Investing PG - 35--48 VI - 3 IP - 3 4099 - https://pm-research.com/content/3/3/35.short 4100 - https://pm-research.com/content/3/3/35.full AB - Exchange-traded products (ETPs) linked to futures contracts on the CBOE S&P 500 Volatility Index (VIX) have grown in volume and assets under management in recent years, in part because of their perceived potential to hedge against stock market losses.In this article, we study whether VIX-related ETPs can effectively hedge a portfolio of U.S. large-cap stocks. We find that although the VIX increases when large stock market losses occur, ETPs that track short-term VIX futures indices are not effective hedges for stock portfolios because of the negative roll yield accumulated by such futures-based ETPs.ETPs that track medium-term VIX futures indices suffer less from negative roll yield and thus appear somewhat better hedges for stock portfolios. Our findings cast doubt on the potential diversification benefit from holding ETPs linked to VIX futures contracts.We also study the effectiveness of VIX ETPs in hedging leveraged exchange-traded funds (LETFs), in which rebalancing effects lead to significant losses for buy-and-hold investors during periods of high volatility. We find that VIX futures ETPs usually are not effective hedges for LETFs.TOPICS: Exchange-traded funds and applications, portfolio construction, mutual fund performance