An overview of Volatility (VIX futures based) Exchange Traded Funds (ETFs and ETNs). Examines the diversification benefits of volatility funds as well as costs such as roll costs.

1. Volatility (VIX Based)
Exchange Traded Funds
(ETFs) & Notes (ETNs)
An overview

2. Volatility is emerging as an important asset class because:
• It offers diversification benefits due to its negative correlation with the S&P 500
• There are now several VIX based products available that give retail investors
access to this asset class for the first time
However, the diversification benefits of VIX come at a cost
• Most VIX based funds roll short-term futures contracts into longer-term futures
contracts
• The average daily roll cost is 0.16% and 0.02% for the Short-Term
&Mid--‐Term indices respectively for the 2005--‐2010 period
For investors going long volatility, the Mid-term VIX offers the same diversification
benefits but much lower roll cost than the Short-term VIX.
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3. • The most widely adopted measure of US stock market volatility is the VIX
index (often referred to as the ‘fear gauge’ in the media)
• It measures the expected volatility in the S&P 500 Index over the next 30
days. In a traditional stock index like the S&P 500, the components of the
index are the 500 individual stocks. By contrast, the VIX Index is comprised
of call and put options rather than stocks
• It is important to remember that VIX measures investors’ expectations of
volatility (implied volatility) rather than actual historical volatility. The chart on
Slide 3 shows the historical trend in the VIX since its introduction in 1991
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4. •
•
1
0.0
10.0
50.0
60.0
70.0
20.0
30.0
40.0
2
Jan-90
Jul-90
Jan-91
3
Jul-91
Jan-92
4
Jul-92
Jan-93
Jul-93
5
Jan-94
Jul-94
6
Jan-95
Jul-95
Jan-96
7
Jul-96
Jan-97
Jul-97
8
Jan-98
Jul-98
9
Jan-99
Jul-99
Jan-00
10
Jul-00
Jan-01
Jul-01
11
Jan-02
Jul-02
Jan-03
12
Jul-03
Jan-04
13
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
The historical average (median) VIX value is 19.04
Jan-07
on only 10% of all trading days since its inception
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
1410 1511 1612 17
Jan-10
Jul-10
Jan-11
Jul-11
The 90‐percentile cutoff is 30.12 i.e. the VIX has exceeded that value

5. • Historically, retail investors have reacted to periods of uncertainty by moving
out of equities and into cash
• Studies such as the annual QAIB report from Dalbar show that poor market
timing during periods of uncertainty results in lower long-term returns
% of Trading Days with
Time Period Average VIX Value
>1% change in S&P 500
Historical Average 20.5* 23.07%**
‘Post Lehman’ 45.8 70%
(Sep ’08 – May ’09)
‘Mid year 2010’ 31.2 60%
(May ’10 – June ’10)
* 1990 to November 2011, data sourced from CBOE; ** 1928 – 2011, data sourced from S&P
1 2 3 4 5 6 7 8 9 10 11 12 13 1410 1511 1612 17

6. • One of the features of volatility as an asset class is its strong negative
correlation with the S&P 500.
• The VIX Index and the S&P 500 have a -76% correlation based on the past 5
years of historical index data.
• VIX index returns are usually positive on days when the S&P 500 shows a
sharp decline of >1%.
• The chart on Slide 6 shows the 21 trading day rolling correlation between the
spot VIX Index and the S&P 500 over the past 5 years. This indicates that
volatility can be viewed as a distinct asset class that could offer diversification
benefits to investors in a broad equity portfolio.
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7. 1
0.00
-1.20
-1.00
-0.80
-0.60
-0.40
-0.20
2
10/17/20…
11/22/20…
3
1/3/2007
2/9/2007
3/20/2007
4
4/26/2007
6/4/2007
5
7/11/2007
8/16/2007
9/24/2007
6
10/30/20…
12/6/2007
1/15/2008
7
2/22/2008
4/1/2008
8
5/7/2008
6/13/2008
7/22/2008
9
8/27/2008
10/3/2008
11/10/20…
10
12/17/20…
1/27/2009
3/5/2009
11
4/13/2009
5/19/2009
6/25/2009
12
8/3/2009
9/9/2009
13
10/15/20…
11/20/20…
12/30/20…
2/8/2010
3/17/2010
4/23/2010
6/1/2010
7/8/2010
8/13/2010
9/21/2010
10/27/20…
1410 1511 1612 17
12/3/2010
1/11/2011
2/17/2011
3/28/2011
5/4/2011
6/10/2011
7/19/2011
8/24/2011
9/30/2011

8. • The negative correlations of the VIX index make it a potentially good way to
diversify a portfolio. However there is no easy way to access the ‘spot’
market for volatility.
• One approach now available is to buy funds that hold VIX futures contracts.
This is similar to the commodities markets – retail investors cannot easily
buy, store and sell natural gas, but can invest in funds that hold natural gas
futures.
• In the last few years, indices have been introduced that model a strategy of
holding VIX futures.
– For example, the S&P 500 VIX Short-Term Futures Index measures the
return from holding first and second month VIX futures contracts. The
index maintains a constant one-month maturity.
– Similarly, the S&P 500 VIX Mid-Term Futures Index holds
fourth, fifth, sixth and seventh month futures contracts, while
maintaining a constant five-month maturity.
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9. • It is important to remember that futures based products will have
different return characteristics than getting direct exposure to ‘spot’ VIX.
• However they can still serve as a useful proxy. The Short-Term &
Mid-Term VIX Futures Indices have a high correlation with spot VIX and
negative correlations with the S&P 500.
S&P 500 Short Term VIX Mid Term VIX VIX
S&P 500 100%
Short Term VIX -80% 100%
Mid Term VIX -78% 90% 100%
VIX -76% 88% 80% 100%
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10. • An example: S&P 500 Short Term Futures Index
• The long futures position is rolled every day from the first month to
second month futures in equal fractional amounts.
Start of End of Roll
Roll Period Period
100%
80%
60%
Dec Futures
40% Weight
Nov Futures
20% Weight
Oct Futures
0% Contract
9/20/2011
10/4/2011
10/12/2011
10/18/2011
10/20/2011
10/24/2011
10/28/2011
11/3/2011
9/22/2011
9/26/2011
9/28/2011
9/30/2011
10/6/2011
11/1/2011
11/7/2011
11/9/2011
10/10/2011
10/14/2011
10/26/2011
11/11/2011
11/15/2011
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

11. • Rolling near-month VIX futures contracts into next-month contracts can
result in a loss in portfolio value.
• For e.g. 2007, on an average 0.126% of the Short--‐term Futures Index
value was lost daily due to the index roll.
300,000
250,000
200,000
TR Level
150,000
100,000
50,000
0
3/20/2006
6/20/2006
9/20/2006
3/20/2007
6/20/2007
9/20/2007
3/20/2008
6/20/2008
9/20/2008
3/20/2009
6/20/2009
9/20/2009
3/20/2010
6/20/2010
9/20/2010
3/20/2011
6/20/2011
9/20/2011
12/20/2007
12/20/2008
12/20/2005
12/20/2006
12/20/2009
12/20/2010
Date
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10 11 12 13 14 15 16 17

12. As of Dec 7, 2011, there were 4 ETFs and 26 ETNs. The table below lists a few
of these for purposes of comparison.
ProShares VIX ProShares Short ProShares
iPath S&P 500
Short-Term VIX Short-Term VIX Mid-Term
Dynamic VIX ETN
Futures ETF Futures ETF Futures ETF
Ticker Symbol VIXY SVXY VIXM XVZ
Investment Objective Match the Inverse (-1x) of the Match the Match the
performance of the performance of the performance of the performance of the
S&P 500 VIX Short- S&P 500 VIX Short- S&P 500 VIX Mid- S&P 500 Dynamic
Term Futures Index Term Futures Index Term Futures Index VIX Futures Total
Return Index
Expense Ratio 0.85% 0.95% 0.85% 0.95%
Fund structure Delaware statutory Delaware statutory Delaware statutory Exchange Traded
trust trust trust Note (ETN)
Average settlement date of 1 month 1 month 5 months Variable
underlying VIX futures
contract
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11 12 13 14 15 16 17

13. Below are some of the key features that should be considered when comparing
funds:
Fund structure: Unlike ETFs, ETNs are debt instruments. The investor is taking
on the credit risk of the issuer and should also look at their creditworthiness.
Maturity of futures contract: One of the consequences of the maturity period is
the roll cost. Short-term indices can have a high roll cost which can offer
portfolio performance while still providing diversification benefits.
Roll Mechanism: If roll cost is a significant consideration, investors could
consider products that attempt to minimize daily roll cost.
Correlation with underlying index: Some VIX-based funds simply try to replicate
a long position in the underlying index. Others may adopt an inverse
strategy, where the daily return of the fund is directionally opposite to the daily
index return.
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12 13 1410 1511 1612 17

14. • What practical implications does our analysis have for investors? One
conclusion is that for investors considering long VIX exposure, the mid-term
VIX product VIXM appears to offer the same diversification benefits as the
short term VIXY, but at a much lower roll cost.
• In order to see the effect of including a VIX futures based fund, we looked at
a hypothetical equity portfolio holding US (S&P 500) and global developed
(EAFE) equities.
• In our base case, our portfolio holds largely (90%) the S&P 500 and has
some exposure (10%) to EAFE, and has a historical annualized return of -
0.76% with a standard deviation of 22.27% and Sharpe Ratio of -0.05.
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13 14 15 16 17

15. Table 4 – Adding Mid-Term VIX to a portfolio
If 20% of the portfolio is allocated to
Standard
Mid Term VIX Return
Dev
Sharpe Ratio the Mid-Term VIX Futures Index, the
Index weight return improves to 0.91% and the
-0.76% 22.27% -0.05
0 -0.76% 22.27% -0.05 Sharpe ratio to 0.03 (Table 4). This
0.1 0.07% 20.08% -0.01 does not however hold when the
0.2 0.91% 18.50% 0.03 Short-Term Index, likely due to its
0.3 1.74% 17.71% 0.08 strong negative return over the
period and high standard deviation.
Table 5 – Adding Short-Term VIX to a portfolio
Standard
Short Term VIX Return Sharpe Ratio Investors could instead consider
Dev
Index weight
-0.76% 22.27% -0.05 including the inverse short term
0 -0.76% 22.27% -0.05 VIX (SVXY) to their portfolio, or
0.1 -3.56% 20.69% -0.19 consider a product like XVIX that
0.2 -6.36% 21.04% -0.32 goes long the Mid-term VIX and
0.3 -9.16% 23.24% -0.41
short the Short-term VIX.
1 2 3 4 5 6 7 8 9 10 11 12 13 14
14 15 16 17

16. Annual Expense Average Futures
Investment Objective Ratio/Investor Fee Fund Structure Maturity
VIXY Match the performance of the S&P 500 VIX 0.85% Delaware 1 month
Short-Term Futures TR Index statutory trust
SVXY Inverse (-1x) of the daily performance of the 0.95% Delaware 1 month
S&P 500 VIX Short-Term Futures TR Index statutory trust
VIXM Match the performance of the S&P 500 VIX 0.85% Delaware 5 months
Mid-Term Futures TR Index statutory trust
UVXY Match twice (2x) the daily performance of the 0.95% Delaware 1 month
S&P 500 VIX Short-Term Futures Index statutory trust
VXX Linked to the performance of the S&P 500 VIX 0.85% Note (Unsecured 1 month
Short-Term Futures TR Index debt)
XXV Linked to the inverse performance of the S&P 0.89% Note (Unsecured 1 month
500 VIX Short-Term Futures Index Excess debt)
Return
VZZB Match the daily performance of the S&P 500 0.89% Note (Unsecured 5 months
VIX Mid-Term Futures Index TR debt)
VXZ Match the daily performance of the S&P 500 0.89% Note (Unsecured 5 months
VIX Mid-Term Futures Index TR debt)
XVZ Dynamically allocates between the S&P 500® 0.95% Note (Unsecured Variable
VIX Short-Term Futures Index ER and the S&P debt)
500 VIX Mid-Term Future Index ER by
monitoring the steepness of the implied
volatility curve
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
15 16 17

17. Annual Expense Average Futures
Investment Objective Ratio/Investor Fee Fund Structure Maturity
IVOP Inverse exposure to the S&P 500 VIX Short- 0.89% Note 1 month
Term Futures Index Excess Return. (Unsecured
debt)
TVIX Match twice (2x) the daily performance of 1.65% Note 1 month
the S&P 500 VIX Short-Term Futures Index (Unsecured
ER debt)
VIIX Match the daily performance of the S&P 500 0.89% Note 1 month
VIX Short-Term Futures Index ER (Unsecured
debt)
XIV Match the inverse of the daily performance 1.35% Note 1 month
of the S&P 500 VIX Short-Term Futures Index (Unsecured
ER debt)
TVIZ Match twice (2x) the daily performance of 1.65% Note 5 months
the S&P 500 VIX Mid-Term Futures Index ER (Unsecured
debt)
VIIZ Match the daily performance of the S&P 500 0.89% Note 5 months
VIX Mid-Term Futures Index ER (Unsecured
debt)
ZIV Match the inverse of the daily performance 1.35% Note 5 months
of the S&P 500 VIX Mid- Term Futures Index (Unsecured
ER debt)
VXAA Match the daily performance of the S&P 500 0.85% Note 1 month
VIX Short-Term Futures Index TR (Unsecured
debt)
VXEE Match the daily performance of the S&P 500 0.85% Note 5 months
VIX 5-Month Futures Index TR (Unsecured
debt)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
16 17

18. Annual Expense Average Futures
Investment Objective Ratio/Investor Fee Fund Structure Maturity
VXFF Match the daily performance of the S&P 500 0.85% Note 6 months
VIX 6-Month Futures Index TR (Unsecured
debt)
AAVX Short (inverse) exposure to the performance 1.35% Note 1 month
of the S&P 500 VIX Short-Term Futures Index (Unsecured
ER debt)
BBVX Short (inverse) exposure to the performance 1.35% Note 2 months
of the 2-Month Futures Index ER (Unsecured
debt)
CCVX Short (inverse) exposure to the performance 1.35% Note 3 months
of the 3-Month Futures Index ER (Unsecured
debt)
DDVX Short (inverse) exposure to the performance 1.35% Note 4 months
of the 4-Month Futures Index ER (Unsecured
debt)
EEVX Short (inverse) exposure to the performance 1.35% Note 5 months
of the 5-Month Futures Index ER (Unsecured
debt)
FFVX Short (inverse) exposure to the performance 1.35% Note 6 months
of the 6-Month Futures Index ER (Unsecured
debt)
XVIX Linked to the performance of the S&P 500 0.85% Note 100% Long position in
VIX Futures Term-Structure Index Excess (Unsecured Mid-term (5 month
Return debt) maturity) VIX; 50%
short position in
Short-term VIX
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17

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