Analyst Report

This ETN is one of several that allows investors to achieve exposure to volatility, an asset class that has appeal thanks to a negative correlation with equity markets and tendency to perform well when investors anxiety spikes. Like most other ETPs in the Volatility ETFdb Category, XVZ probably isn't appropriate for use in a long-term, buy-and-hold portfolio; this product is of more use for more active investors looking to place a shorter term bet on volatility (or to protect against a slide in equity valuations).

Most ETPs that offer exposure to volatility seek to replicate either an index comprised of short-term futures contracts (which exhibit greater correlation to the spot VIX but may be more subject to adverse impact of contango) or mid-term futures contracts. XVZ, however, maintains the flexibility to oscillate between these positions; the index will shift between these two segments of the volatility markets based on the implied slope of teh VIX futures curve. Investors who would rather stick to one asset sub-class or the other have no shortage of options in the Volatility ETFdb Category for targeting either short-term or mid-term VIX futures. This ETN could be appealing to those who believe that shifting between the two can result in more effective exposure to volatility.

There are a few aspects of XVZ that are worth noting. First, it is important to understand that this product doesn't offer exposure to the spot VIX. When held for extended periods of time XVZ will tend to lag behind a hypothetical investment in the VIX. Like most products offering exposure to volatility, XVZ is likely to lost value over the long run. It should also be noted that XVZ is an ETN, which means that it exposes investors to the credit risk of the issuing bank (since it is a debt instrument) but will not incur tracking error that can erode returns to ETFs.

Overall, this product is of no use to the vast majority of investors. And those who are sophisticated enough to seek volatility exposure are probably better off managing their positions more closely.