ETF Pipeline Grows: More Hedge Fund Products, VIX ETNs In The Works

by on November 5, 2010 | ETFs Mentioned:

Less than a week into November, the month is shaping up to be one of the most active in recent memory for the ETF industry. Vanguard (international real estate ETF), UBS (another MLP ETN), PIMCO (laddered Treasury fund), and Global X (Gold Explorers) have already launched new ETFs, and several more issuers are expected to debut new products in coming weeks. And as new funds hit the market, the product pipeline is quickly refilled with ideas for new products.

One of the more interesting filings to hit the SEC’s desk this week came from ProShares, which detailed plans for its Hedge Fund Replication ETF. The proposed fund would track the performance of the Merrill Lynch Factor Model – Exchange Series. That benchmark is designed to maintain a high correlation with hedge fund beta, as represented by the HFRI Fund Weighted Composite Index, an equally-weighted composite of more than 2,000 constituent funds.

The proposed fund would not invest directly in hedge funds, instead seeking to replicate an index based on a model that establishes weighted long or short positions on six factors on a monthly basis: the S&P 500 Total Return Index, ProShares UltraShort Euro ETF, MSCI EAFE U.S. Dollar Net Total Return Index, MSCI Emerging Markets Free U.S. Dollar Net Total Return Index, Russell 2000 Total Return Index, and one-month USD LIBOR [see Door Opens For Hedge Fund ETFs].

IndexIQ is the best known provider of hedge fund replication ETFs; the firm’s lineup includes the broad IQ Hedge Multi-Strategy Tracker (QAI), as well as the more targeted IQ Hedge Macro Tracker ETF (MCRO) and IQ Merger Arbitrage ETF (MNA). Other players in the hedge fund ETF space include iShares, which offers the actively-managed Diversified Alternatives Trust (ALT). That product seeks to maximize absolute returns from investments with historically low correlations to traditional asset classes, while minimizing volatility by taking both long and short positions. Credit Suisse also jumped into the space recently, rolling out both a fund designed to capture returns available through a merger arbitrage strategy (CSMA) and a long/short offering (CSLS). Both of the Credit Suisse products are structured as exchange-traded notes (ETNs), meaning that they are debt instruments whose return is linked to the performance of an underlying benchmark.

In total, there are seven ETFs in the Hedge Fund ETFdb Category, with aggregate assets of nearly $350 million [see Closer Look At Hedge Fund ETFs].

More VIX ETNs Ahead

Also this week, Citigroup filed details on a proposed exchange-traded note that would offer investors another options for exposure to VIX futures. The C-Tracks Exchange-Traded Notes Based on the Performance of the Citi Volatility Index Total Return (CVOL) would be the first foray into the ETF industry for the financial behemoth, and would enter into a space that has become increasingly competitive in recent months. The underlying index, a new benchmark, is designed to measure directional exposure to the implied volatility of large cap U.S. stocks [see Using ETFs As "Portfolio Insurance"].

Currently, there are three products in the Volatility ETFdb Category, all of which are ETNs from iPath. Existing products include the S&P 500 VIX Short-Term Futures ETN (VXX), a mid-term VIX futures ETN (VXZ) and an inverse S&P 500 VIX Short-Term Futures ETN (XXV). Barclays also offers the ETN+ S&P VEQTOR (VQT), which allocates exposure between equities, volatility futures, and cash, depending on observed levels of volatility in the market. Jefferies has a volatility-linked ETF in the works; that product would be the first to offer investors interest in an underlying basket of volatility-related securities (existing products are all structured as exchange-traded notes, meaning that they are debt instruments linked to the performance of an underlying benchmark).

The proposed Citi ETN would be structured as a ten-year note, and would rank equally with all other unsecured and unsubordinated debt of Citigroup [also make sure to check out our Mutual Fund To ETF Converter].

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Disclosure: No positions at time of writing.