One of the more innovative and popular recent additions to the fast growing ETP lineup is the VelocityShares Daily Inverse VIX Short Term ETN (XIV), an exchange-traded note that offers daily inverse exposure to an index comprised of short-term VIX futures contracts. XIV has become popular as a tool for exploiting the nuances of an upward-sloping futures curve, essentially reversing contango-related headwinds and putting them at the backs of investors [see Highlighting Inverse VIX ETNs].
Thanks in part to tremendous gains recorded in recent months, XIV has quickly taken in more than $250 million in assets–a tremendous pace of growth for such a young ETP. In recent days, there’s been a bit of confusion as to where some of that money went.
Effective June 27, XIV underwent a 10-for-one split whereby every share of XIV was turned into ten shares. The issue of new shares corresponded with a reduction in the per share price; the number of shares outstanding was essentially multiplied by 10 while the per share price was divided by 10. Share splits are routine occurrences, both among common stocks and ETFs. But some investors in certain brokerage accounts may have noticed some unusual activity surrounding the XIV split [see all the Volatility ETPs here].
Within some brokerage accounts, the price of the ETF was reduced in accordance with the split procedure, but there was no corresponding increase in the number of shares held. Scottrade, for example, was still showing pre-split figures as of Thursday morning–meaning that the value of customers’ holdings in XIV seemed to drop precipitously over the past few sessions. A Scottrade customer with 100 shares of XIV saw the position worth about $15,854 at the close of trading on Friday. When the opening bell rang on Monday, that same position was suddenly worth about $1,583–an apparent loss of about 90%. The price dropped, but the number of shares remained constant.
According to Scottrade, the big dip occurred as a result of the technicalities surrounding the manner in which the split was carried out. The explanation we received is that the XIV split was treated as a stock dividend, with each shareholder receiving nine additional shares. Scottrade doesn’t post dividends on foreign stocks (which, apparently, includes XIV in their mind) until they are received from the paying company; therefore, there can be a delay of several days between the split date and the time the proceeds show up in the customer account.
So for the hypothetical Scottrade account holder who finished last week with 100 shares and started this week with 100 considerably cheaper shares, the additional 900 shares are coming eventually. You’re not getting cheated out of 90% of your XIV holdings. If you were planning to keep your XIV position open for a while, this might not be a big deal. However, for those who were hoping to close out the position–perhaps locking in some of the 11% gains booked between Monday’s open and Wednesday’s close–the lack of shares in the account could have posed a problem [Volatility ETN Investing 101].
It should be noted that the disappearing act was far beyond the control of the ETN issuers (XIV is marketed by VelocityShares). Rather, the confusion was a result of the policies in place at certain brokerages. And it should be noted that not all firms handled XIV’s 10-for-1 split as Scottrade did; TD Ameritrade accounts showed the increased number of shares of XIV in client accounts shortly after the split. TD clients with 100 shares of XIV on Friday afternoon had 1,000 shares when they logged in Monday morning.
ETPs have unfairly received some bad publicity on multiple occasions in recent years [see Why An ETF Can't Collapse]. On the surface, XIV’s sudden price drop might seem like another opportunity to bash the exchange-traded structure. But it’s not. The delays in recognizing the full effect of the split have nothing to do with the issuing institution. So if you’re upset that your XIV shares are nowhere to be found, call Scottrade–not the ETN issuer.
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Disclosure: Long XIV.