Investing In Volatility - The New Volatility Landscape

Following the events of Feb. 5th, several volatility linked products have been delisted or deleveraged. We thought now was a good time to take a step back and survey the volatility landscape as it exists today. If you’d like to read a brief summary of the causes of Feb. 5th I recommend my earlier article available here.

Since Feb. 5th, five volatility products have been liquidated and four have had their investment objectives altered. Nomura was the first to announce a liquidation - their Next Notes S&P 500 VIX Short-Term Futures Inverse Daily Excess Return Index ETN (Ticker: 2049.JP) on Feb. 5th - followed the next day by Credit Suisse and their popular VelocityShares Daily Inverse VIX Short-Term ETN (Ticker: XIV). [1] Both of those products offered investors 1x daily inverse exposure to the S&P 500 VIX Short-Term Futures Index (Ticker: SPVXSP), and both lost more than 95% of their value on Feb. 5th. The fallout continued, and in June UBS announced the liquidation of three of its volatility based strategy ETNs, the VelocityShares Short Volatility Hedged ETN, the VelocityShares VIX Tail Risk ETN, and the VelocityShares VIX Variable Long/Short ETN (Tickers: XIVH, BSWN, and LSVX) all having lost considerable value in February, but perhaps more importantly, having failed to attract significant investment interest. [2]

But retiring VIX Exchange Traded Products (ETPs) is not a new thing, and the thinning out of the VIX ETP market is probably a good thing for the volatility market as a whole. A month before Feb. 5th Barclays announced the closure of its iPath Inverse S&P 500 VIX Short-Term Futures ETN (Ticker: IVOP) and iPath Inverse S&P 500 VIX Short-Term Futures ETN (Ticker: XXV). [3] Both products having failed to gain much traction. A couple of years earlier, AccuShares liquidated their Spot CBOE VIX Up Shares and Down ETFs (Tickers: VXUP and VXDN) and Citi closed its C-Tracks Citi Volatility Index Total Return ETF (Ticker: CVOL). Those three products were conceptually impressive, but seemingly too complicated for most VIX ETP traders.

The two short dated VIX products that did survive Feb. 5th were later deleveraged. The ProShares Short VIX Short-Term Futures ETF (Ticker: SVXY) - offering very similar exposure to XIV, but fairing slightly better during its Feb. 5th end of day rebalance - lost 90% of its value but survived liquidation. While it did survive, its sponsor quickly decided to deleveraged its exposure from -1x to -0.5x of the SPVXSP index. UVXY, the previously 2x leveraged long volatility ProShares ETF was also deleveraged from 2x of the SPVXSP index to 1.5x. While these decisions were reported as being in the ‘best interests of the funds and their shareholders’, the rising cost of futures margin after Feb. 5th probably meant ProShares was no longer able to maintain the larger exposure in the funds. [4]

Two less popular funds  – VMAX and VMIN – were deleveraged too, although in a way that seems less understood by the market. Instead of the blend of short dated ETPs and weekly VIX futures they had offered in the past, the new funds now take long and short positions in VIX futures that are three, four, and five months out.

So where does that leave us now? How can a risk seeking volatility ETP trader or keen volatility investor get best access to the volatility market? Well fortunately there are still several other products out there either unphased by the events of February or even benefiting from it.

At the most turbo charged end of the market are the leveraged VIX products – particularly the VelocityShares Daily 2x VIX Short Term ETN (Ticker: TVIX) and the now slightly deleveraged UVXY ETF introduced above. Both products still command almost half a billion dollars of AUM each, and both performed extremely well on Feb. 5th.

Leveraged Volatility ETPs [5]

 

Ticker          Name                                                                                 AUM (m)                Vehicle Type

 

TVIX           VelocityShares Daily 2x VIX Short Term ETN                   $454.2                   Note

 

UVXY         ProShares Ultra VIX Short-Term Futures ETF                  $435.2                   ‘33 Act Partnership

 

TVIZ           VelocityShares Daily 2x VIX Medium Term ETN              $4.5                      Note

 

On the unleveraged long side, the Barclays’ iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX and VXXB see footnote) continues to dominate the market with $900M under management, and a liquid chain of available options. [6] The ProShares VIX Short-Term Futures ETF (Ticker: VIXY) is doing well too, with more than $115m under management, and the ProShares product makes a useful fund based alternative to Barclays’ VXX note – remember how funds don’t carry the same credit risk associated with notes!

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