Trading in the iPath Inverse January 2021 S&P 500 VIX Short-Term Futures ETN (IVO) was suspended on Monday after the note’s indicative value hit the automatic termination level of $10.00 per share. IVO, which offers inverse exposure to an index comprised of VIX futures contracts, tumbled in Monday morning trading as anxiety over the Greek default situation spooked investors. The automatic redemption level of $10 per share represented a drop of about 16% from Friday’s closing price.
The IVO prospectus specifies that the note will be automatically redeemed by Barclays, the issuing institution, when the intraday indicative note value is equal to or less than $10.00. According to a press release from Barclays, IVO hit that level shortly after 2:00 ET on Monday. Barclays also noted that holders of the notes would receive a cash payment equal to the automatic redemption value, which will be equal to the closing indicative note value on Monday [see Inverse VIX ETNs: Reviewing All The Options].
Interestingly enough, markets rallied into the close on Monday, which sent the VIX sharply lower off of its intra-session highs. That pushed IVO higher once the redemption had already been triggered. According to Yahoo! Finance, the ETN closed at $10.50 and had surged to $11.78 in after hours trading. That represented a jump of about 12% from the closing bell and a gain of almost 18% from the $10 trigger point. Despite the temporary suspension of trading, IVO was extremely active; more than 515, 000 shares traded hands on the day, roughly in line with the one month average.
Under The Hood Of IVO
IVO is a unique product that offers inverse exposure to an index comprised of short-term VIX futures contracts. Because the VIX tends to climb when equity markets encounter turbulence and sink when stocks climb, volatility ETPs have become popular as tools for hedging against stock exposure or betting on a decline in global equity markets [see Volatility ETFs: The Real Safe Haven?].
IVO is one of several products that offers inverse exposure to a futures-based index, a strategy that can be used to exploit contango in VIX futures markets. But as the VIX has surged and futures markets have moved into a backwardated state, inverse VIX ETPs such as IVO have struggled in recent weeks.
The freefall in IVO was exacerbated by the reset mechanism utilized by the ETN–or lack thereof. While many inverse ETPs seek to achieve that target multiple over the course of a single trading day, IVO was designed to offer -100% exposure to the underlying index over the term of the note, from inception earlier this year to maturity in January 2021. As a result, the “participation ratio” offered to investors has deviated from -1.0, and had climbed to more than 2.3 as of Friday according to the iPath web site [see Inside The 8x Leveraged ETN].
The VelocityShares Daily Inverse VIX Short Term ETN (XIV), which resets exposure on a daily basis, finished Monday down about 0.9%. That ETN had been down more than 7% at one point in Monday trading before rallying along with U.S. equity markets into the close.
Another ETN Goes Down
IVO is the third ETN to be redeemed so far in 2011; in July the Long Enhanced S&P 500 VIX Mid-Term Futures ETN (VZZ) suffered the same fate. Shortly after that redemption, iPath issued a new ETN that offered similar exposure, VZZB. Earlier in the year, the Barclays Short D Leveraged Inverse S&P 500 TR ETN (BXDD) was also redeemed.
By hitting the automatic redemption level, IVO becomes one of the shortest-lived products in the relatively short history of the industry. The ETN debuted earlier in 2011, and lasted just over eight months before being redeemed. A handful of other exchange-traded products have been shuttered after very short operating histories, including a suite of single country ETFs from Northern Trust. IVO began trading at about $20 per share in January 2011 [see ETF Hall of Shame: Exchange-Traded Debacles].
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Disclosure: No positions at time of writing.