By Michael Johnston of
This exchange-traded note is linked to an index consisting of short-term futures on the CBOE Volatility Index, better known as the "VIX" and often referred to as the "fear index." The VIX measures the anticipated volatility in equity markets, making it essentially a measure of investor anxiety. VXX maintains a strong, inverse relationship with global equity markets, meaning it will thrive during periods of uncertainty and fall when confidence in the global economy is running high (the VIX touched a record high during the most recent recession, just as most other asset classes were plummeting). Because the market for VIX futures is contangoed, VXX will regularly face some pretty strong headwinds and should be expected to have a negative return over the long term. But because it maintains a correlation with domestic and international equity funds that approaches negative 0.90, it generally performs very well during periods of turbulence in equity markets. For example, on May 6, VXX gained more than 30% at one point, ultimately finishing the "flash crash" session with a more modest gain of about 9%. The index to which VXX is linked consists of first- and second-month VIX contracts, making it most sensitive to changes in the spot level of that benchmark. iPath also offers an ETN linked to longer-dated VIX futures contracts; VXZ is linked to an index consisting of fourth-, fifth-, sixth- and seventh-month futures contracts.