A Survey Of Volatility ProductsAdvisor Perspectives
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Despite the extraordinary events of February 5 last year, resulting in no less than five VIX futures-linked exchange traded products (ETPs) being withdrawn, VIX ETPs are once again growing in popularity. The VelocityShares Daily 2x VIX Short Term ETN (Ticker: TVIX), for example, recently passed the $1 billion AUM mark, while competing products like UVXY and VXX continue to grow.
However, despite this resurgence in popularity, some advisors are reluctant to reenter an asset class that saw so much turmoil last February. This introductory article, together with several forthcoming and more detailed articles, will address some of those concerns, discuss the present VIX landscape, and help explain what really happened on February 5, 2018.
VIX ETPs are somewhat complex products that are designed to be actively traded rather than blindly bought and held. For example, in the TVIX prospectus, Credit Suisse states that the notes are, “…intended to be trading tools for sophisticated investors…” and that, ”the ETNs are only suitable for a very short investment horizon.” The reasons for this are varied and sometimes complex, but, put simply, positions in long-volatility products usually entail a slow but material decay, while positions in short volatility products can expose the trader to sudden losses. My colleague, Vance Harwood, and I have written extensively on how these products function, and if you have interest in knowing more I invite you to our research site or to contact us directly.
There are 11 VIX ETPs available to trade – seven long volatility, two short (or more correctly, daily inverse), and two strategy ETPs. While the long and inverse ETPs are somewhat simpler in that they offer almost consistent exposure to VIX futures though their defined link to the S&P 500 VIX Short-Term Futures Index (Ticker: SPVXSP) or its medium-term cousin SPVXMP, the strategy funds vary their exposure to the VIX futures according to a more complex methodology.
At the most turbo-charged end of the VIX market are the leveraged products – particularly the VelocityShares Daily 2x VIX Short Term ETN (Ticker: TVIX) and the slightly deleveraged (1.5x) ProShares Ultra VIX Short-Term Futures ETF (Ticker: UVXY). Both of these ETPs offer leveraged (either 2x or 1.5x) long exposure to SPVXSP VIX futures index. These two products together command almost $1.5bn of AUM – amounting through their leverage to almost $2.5bn of exposure the SPVXSP index. These products are liquid, performed well through February 5, and are best-suited to traders looking to benefit from spikes in equity volatility. That said, leveraged-long VIX ETPs like these suffer from the largest rate of decay, and traders need to time their entry and exit points carefully.
Leveraged-long volatility ETPs
|Ticker||Name||AUM (m)||Vehicle Type|
|TVIX||VelocityShares Daily 2x VIX Short Term ETN||$912.22||Note|
|UVXY||ProShares Ultra VIX Short-Term Futures ETF||$548.69||’33 Act Partnership|
On the unleveraged long side, the Barclays’ iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) continues to dominate the market with almost $900 million under management, as well as a liquid chain of available options. Its competition, the ProShares VIX Short-Term Futures ETF (Ticker: VIXY) is growing fast too, with almost $300 million under management. The ProShares product makes a useful fund or ETF based alternative to Barclays’ VXX note or ETN – funds don’t carry the same credit risk associated with notes.
Read the full article here by Stuart Barton, Advisor Perspectives