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I'm trying to understand how VXX works (the prospectus on Barclay's Ipath). It says that it has a rolling position in futures (1 month and 2 month). Does that mean that it buys and sells contracts daily? How would this create a profit/loss?

Also, it describes a "closing indicative value" which seems to track the index, and its value is derived from the maturity (based on the index). The total returns should therefore come from the rolling futures position plus the closing indicative value, right?

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Generally, ETFs work on the basis that there exists a pair of values that can be taken at any moment in time: A Net Asset Value of each share in the fund and a trading market price of each share in the fund. It may help to picture these in baskets of about 50,000 shares for the creation/redemption process.

If the NAV is greater than the market price, then arbitrageurs will buy up shares at the market price and do an "in-kind" transaction that will be worth the NAV value that the arbitrageurs could turn around and sell for an immediate profit.

If the market price is greater than the NAV, then the arbitrageurs will buy up the underlying securities that can be exchanged "in-kind" for shares in the fund that can then be sold on the market for an immediate profit.

What is the ETF Creation/Redemption Mechanism? would be a source on this though I imagine there are others.

Now, in the case of VXX, there is something to be said for how much trading is being done and what impact this can have.

From a July 8, 2013 Yahoo Finance article:

At big option trade in the iPath S&P 500 VIX Short-Term Futures Note is looking for another jump in volatility.

More than 250,000 VXX options have already traded, twice its daily average over the last month. optionMONSTER systems show that a trader bought 13,298 August 26 calls for the ask price of $0.24 in volume that was 6 times the strike's previous open interest, clearly indicating new activity.

Now the total returns of the ETF are a combination of changes in share price plus what happens with the distributions which could be held as cash or reinvested to purchase more shares.

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