Short-Term Volatility ETN (VXX) To Undergo Reverse Split

by on October 27, 2010 | ETFs Mentioned:

Barclays Bank PLC has announced that it will implement a one-for-four reverse split of the iPath S&P 500 VIX Short-Term Futures ETN (VXX) VXX, effective Tuesday November 9. The move comes as the value of the note has fallen well below the $25 mark, which contractually allows Barclays to initiate a reverse split; as of Wednesday shares were trading around $13.40. The reverse split will be effective at the open of trading on November 9th and notes will begin trading on the NYSE Arca and the TSX on a reverse-split adjusted basis on that date. The adjusted notes will have a new CUSIP but will retain the same ticker symbols.

Despite uncertain prospects for the global economy, U.S. equities have managed to surge higher over the past few months thanks to impressive earnings reports and ongoing hopes over a massive QE program from the Fed. While this rally has been cheered by equity investors, it has battered the value of futures contracts linked to the CBOE Market Volatility Index–better known as the VIX or “fear index.” VXX, which is linked to an index that maintains a daily rolling long position in first and second month VIX futures contracts, has lost more than 60% so far in 2010 and nearly 70% over the past full year. The market for VIX options is often in steep contango; December contracts are currently trading at a premium of nearly 9% to November futures. That means that even when the VIX stays level, a futures-based strategy–such as the one to which VXX is linked–can lose value in a hurry.

Despite its terrible performance, VXX remains extremely popular with traders and short-term investors who seek a way to hedge portfolios in uncertain times. VXX currently trades an average of 24 million shares a day, and has assets of more than $2 billion. The note exhibits a strong negative correlation with equity markets, making it one of the most effective diversifying agents in the ETF universe [see Using ETFs As Portfolio Insurance].

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Disclosure: No positions at time of writing.