Barclays Capital announced the latest addition to its ETN product lineup this week, launching the first exchange-traded product designed to offer inverse exposure to the primary measure of equity market volatility. The Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN (XXV) is linked to the inverse performance of the S&P 500 VIX Short-Term Futures Index Excess Return, a benchmark that reflects the returns potentially available through an unleveraged investment in short-term futures on the VIX index.
The CBOE Volatility Index, better known as the VIX and often referred to as the “fear index,” is a popular measure of the implied volatility of S&P 500 index options. The VIX represents the market’s expectation of volatility over the next 30 days. The VIX was introduced in 1993, but options for achieving exposure to the benchmark are relatively new innovations. Trading in VIX futures began in March 2004, and options were introduced two years later. In early 2009, iPath introduced two ETNs linked to the VIX, including a short-term futures ETN (VXX) and mid-term futures ETN (VXZ).
The iPath Volatility ETNs have been tremendously popular with investors since their inception; aggregate assets recently stood at about $2 billion. Because the VIX is effectively a measure of downside volatility, VXX and VXZ have exhibited strong negative correlations with broad equity markets; many investors view these securities as a form of “portfolio insurance” that can provide substantial diversification benefits when added to a traditional stock-and-bond portfolio [read Volatility ETFs: Now Not To Use].
Now investors will have an ETN option to bet on low volatility in XXV, a play that should demonstrate a very strong correlation with global equity markets. “Investors are increasingly looking for diversified ways to access equity market volatility,” said Philippe El-Asmar, Head of Investor Solutions at Barclays Capital in a press release. “We are pleased to provide them with the first exchange traded product that allows them to express a bearish view on volatility.”
XXV is structured as a senior, unsecured debt security issued by Barclays Bank PLC that will mature in July 2020. XXV will charge an expense ratio of 0.89%, and won’t make any interest payments during its term [also see Three Low Beta Equity ETFs For A Volatile Market].
Disclosure: No positions at time of writing.