# Tracking VIX with VIX Futures: Portfolio Construction and Performance

## TL;DR

This paper investigates static and dynamic portfolio strategies of VIX futures to effectively track the VIX index, revealing static portfolios' limitations and proposing a dynamic trading approach that outperforms existing volatility ETNs.

## Contribution

The paper introduces a dynamic trading strategy for VIX futures that improves tracking performance, supported by empirical calibration and simulation, and compares favorably to VXX.

## Key findings

- Static VIX futures portfolios fail to track VIX closely.
- A dynamic trading strategy significantly improves tracking accuracy.
- The proposed strategy outperforms the volatility ETN VXX.

## Abstract

We study a series of static and dynamic portfolios of VIX futures and their effectiveness to track the VIX index. We derive each portfolio using optimization methods, and evaluate its tracking performance from both empirical and theoretical perspectives. Among our results, we show that static portfolios of different VIX futures fail to track VIX closely. VIX futures simply do not react quickly enough to movements in the spot VIX. In a discrete-time model, we design and implement a dynamic trading strategy that adjusts daily to optimally track VIX. The model is calibrated to historical data and a simulation study is performed to understand the properties exhibited by the strategy. In addition, comparing to the volatility ETN, VXX, we find that our dynamic strategy has a superior tracking performance.