If XIV had been around in 2008 it would have taken a sickening drawdown but it would have bounced back much faster than stocks did.
It's not "picking up nickles in front of a steamroller" because there isn't any steamroller, unless you are using leverage. If you're using leverage or having to deal with anxious customers, it isn't for you.
The tracking error is in your favor because of contango, and that's the reason I invest in XIV, not because I think the VIX will go down. Ought of all the inverse volatility products I picked XIV because it profits from contango the best.
Also the cost isn't bad because the trading they are doing is simple and mechanical, it's the kind of thing I could do myself (and might do slightly differently) if I was working on a scale where trading costs were not so bad.
The phenomenon that implied volatility exceeds realized volatility is a force that is as strong, or stronger, as the force you harvest with beta. If they threw Rupert Murdoch in jail for sedition against the human race and outlawed "news" as we know it, that might change, but as long as people are hearing "sell in may and go away on CNBC", XIV is going to keep going up.
The one thing I worry about is that VelocityShares might blow up or that expanding volumes of volatility trading might cause a discontinuity in the options market. So long as XIV doesn't blow up, it is going to make money in the long term.
I do like the idea of strategically selling volatility in a portfolio. I've been toying with the idea of adding some of these orthogonal (or nearly so) parameters in the Kivalia framework...as it would be cool to see how a portfolio is positioned with regards to things like vol, momentum, etc.
I'm sure we'll come back to this, but we'll want some stable ETFs to use as factors. Russell had a slew of interesting ETFs but closed them down due to lack of interest.
Daily inverse VIX?!? Have you heard the expression "picking up nickles in front of a steamroller"? Not to mention the cost and tracking error.