Lower Volatility and Less Severe Drawdowns for VXTH Index That Buys VIX Call Options
The VIX Tail Hedge Index (VXTH) tracks the performance of a hypothetical portfolio that -
- Buys and holds the performance of the S&P 500® total return index, (a pre-tax index with reinvested dividends), and
- Often buys one-month 30-delta VIX call options; the weight of the VIX calls in the portfolio varies at each roll and is spelled out at www.cboe.com/VXTH.
The VXTH Index buys the VIX call options with a goal of providing lesser volatility and smoother returns than the S&P 500 index over long time periods.
As shown in the first chart below, the VXTH had lower volatility than six well-known indexes over a ten-year period.
In addition, the VXTH Index had less severe maximum drawdowns (falls from peak to trough) than three key indexes.
While investors should keep in mind the fact that the costs of frequent purchases of options can add up, the charts above do show that prudent use of long positions in VIX call options had had the potential to provide lower volatility and less left tail risk.