Historical Annual Returns for the VIX Short-Term Inverse Daily Futures Index

As I have previously discussed, the VIX Short Term Futures Inverse Daily Index is a volatile index exhibiting a strong upward bias over time.

The VIX Short Term Futures Inverse Daily Index measures the performance of the inverse (determined daily and on a percentage basis) of the VIX Short-Term Futures Index. The VIX Short Term Futures Index utilizes prices of the next two near-term VIX futures contracts to replicate a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts. This results in a constant one-month rolling long position in  first and second month VIX futures contracts.  The VIX Short Term Futures Inverse Daily Index is designed such that if the VIX Short Term Futures Index rises 2% during a trading session, the VIX Short Term Futures Inverse Daily Index will drop about 2% (e.g., the inverse sign of the percentage movement of the underlying index).

The VIX Short Term Futures Index has experienced a strong downward bias in price movement since its creation as a result of contango.  "Contango" refers to a situation where a longer term future has a higher price than a short term future.  The VIX Short Term Futures Index replaces one-month futures with two-month futures - this process is commonly referred to as a future roll.  If the two-month future is trading at a higher price than the one-month future, the value of the VIX Short Term Futures Inverse Daily Index may increase as a result of this futures roll. 

The VIX Short Term Futures Inverse Daily Index, on the other hand, has experienced a strong upward bias since its creation because this index moves in the opposite direction of the VIX Short Term Futures Index on a daily basis.  Between December 20, 2005 and November 1, 2013, the VIX Short Term Futures Inverse Daily Index rose from a value of 100,000 to a value of 388,349.62, an increase of about 288.350%, or an annualized increase of about 18.9%.  This return is particularly impressive considering that the worst financial crisis since the Great Depression occurred during this time period.  As a point of reference, the total return of S&P 500 Index was about 65.31 % during the same time period, or an annualized gain of about 6.6%.

I was able to obtain daily closing values for the VIX Short Term Futures Inverse Daily Index dating back to January 11, 2008.  I obtained daily closing values for the VIX Short Term Futures Index dating between December 20, 2005 and January 10, 2008 and used this data to estimate the daily returns for the VIX Short Term Futures Inverse Daily Index dating back to December 20, 2005.  The charts below show a combination of (a) estimated daily closing values for the VIX Short Term Futures Index between December 20, 2005 and January 10, 2008; and (b) the actual daily closing values for the VIX Short Term Futures Index between January 11, 2008 and November 1, 2013.

The chart below shows the annual returns for the VIX Short Term Futures Inverse Daily Index between December 20, 2005 and November 1, 2013.  As discussed above, the returns for 2009-2013 are the actual returns of the VIX Short Term Futures Inverse Daily Index and the returns between 2005 and 2008 are based on my estimates of the VIX Short Term Futures Inverse Daily Index.

As shown below, the returns for the VIX Short Term Futures Inverse Daily Index have been incredibly volatile, ranging between 162.578% in 2012 and -70.960% in 2008.  Although the down years have included big decreases, the big increases during the up years have more than made up for the decreases.

There is a strong positive correlation between the S&P 500 Index and the VIX Short Term Futures Inverse Daily Index.  I personally believe that the long-term trend of the S&P 500 Index is up.  Accordingly, the long-term trend of the super-charged VIX Short Term Futures Inverse Daily Index is also likely to be up.  There are two popular investment vehicles for capturing the gains of the VIX Short Term Futures Inverse Daily Index: (a) the Proshares Short VIX Short-Term Futures ETF (symbol: SVXY); and (b) the VelocityShares Daily Inverse VIX Short-Term ETN (symbol: XIV).