UBS has made a major push into a new corner of the ETP market, launching a suite of 12 new exchange-traded notes that offer targeted exposure to VIX futures contracts. The new ETNs include six products offering traditional long exposure and six that offer inverse exposure to indexes comprised of futures contracts linked to the so called “fear index.” The lineup of long VIX ETNs includes notes that target six specific maturities on the VIX index futures curve:
- ETRACS 1-Month S&P 500 VIX Futures ETN (VXAA)
- ETRACS 2-Month S&P 500 VIX Futures ETN (VXBB)
- ETRACS 3-Month S&P 500 VIX Futures ETN (VXCC)
- ETRACS 4-Month S&P 500 VIX Futures ETN (VXDD)
- ETRACS 5-Month S&P 500 VIX Futures ETN (VXEE)
- ETRACS 6-Month S&P 500 VIX Futures ETN (VXFF)
Each ETN is linked to a total return index that is comprised of VIX futures with a weighted average maturity between one to six months, as well as a T-Bill component. The indexes are daily rolling indexes, with rolls occurring on a daily basis in order to keep the weighted average maturity of the underlying contracts constant.
Exposure to volatility through the exchange-traded structure is nothing new; there were previously 16 ETPs in the Volatility ETFdb Category. But the degree of precision available through the new products represents a new concept; existing products had focused either on short-term VIX futures (i.e., similar to the exposure offered by VXAA) or mid-term volatility (similar to the exposure offered by VXFF).
Short VIX ETNs
UBS also announced the launch of six ETNs offering inverse exposure to indexes comprised of VIX futures contracts. That strategy had also been previously available; VelocityShares offers both the Daily Inverse VIX Short Term ETN (XIV) and Daily Inverse VIX Medium Term ETN (ZIV). Similar to the long volatility products, this suite includes options for targeting six different maturities:
- ETRACS Daily Short 1-Month S&P 500 VIX Futures ETN (AAVX)
- ETRACS Daily Short 2-Month S&P 500 VIX Futures ETN (BBVX)
- ETRACS Daily Short 3-Month S&P 500 VIX Futures ETN (CCVX)
- ETRACS Daily Short 4-Month S&P 500 VIX Futures ETN (DDVX)
- ETRACS Daily Short 5-Month S&P 500 VIX Futures ETN (EEVX)
- ETRACS Daily Short 6-Month S&P 500 VIX Futures ETN (FFVX)
Each of the daily short volatility ETNs will charge an annual fee of 1.35%, in line with fees charged by existing VelocityShares ETNs.
Volatility ETNs In Focus
Interest in volatility–and in alternatives in general–has surged in recent years, thanks in part to innovation in the ETF industry that has made these asset classes widely available. VIX futures tend to exhibit a strong negative correlation with global equity markets, meaning that they generally appreciate when stocks encounter turbulence. That characteristic has made them effective as either hedging instruments (essentially a form of “portfolio insurance”) or as securities for betting against stock markets.
Because volatility ETPs follow futures-based strategies, it’s important to note that they won’t correspond to movements in the spot VIX. Rather, the degree of contango or backwardation in futures markets is often a key driver of performance of these products. Because the VIX futures market is usually in a state of consistent–the current environment is an exception–many VIX-related indexes are likely to lose ground over the long run. That makes inverse VIX ETNs, such as those recently introduced by UBS, potentially intriguing tools for exploiting the nuances of futures-based strategies that have contributed to the abysmal historical performance of products such as VXX [see the performance history of VIX ETPs].
With the launch of the new products from UBS, there are now 28 volatility ETPs, most of which are structured as ETNs (ProShares offers the only two VIX ETFs). Aggregate assets in those products is close to $2.5 billion.
Disclosure: No positions at time of writing.