The last three months saw the VIX spot dropped quickly from 30-ish to 10-ish. No wonder XIV, the inverse ETN to the S&P 500 VIX Short-Term Futures Index, was among the top performing ETPs in January. Its return was 30.88% in January 2012 and 14.02% in December 2011.
XIV collects daily roll yield when: 1) the VIX futures curve is in contago, and 2) the VIX spot remains flat or down.
The backwardation we saw in Q3 of 2011 was reversed by the end of last November. Contango is back.
For investors who expect the equity market to move sideways or up in the near term, XIV is an interesting investment opportunity. The potential risk is, when catastrophe hit the market, long XIV investors have to pay. In this sense, buying XIV is similar to selling insurance policies.
Click here for more details on contango and roll of the S&P 500 VIX Futures Indices.