The New Volatility Landscape

Stuart Barton I June 26, 2018

Following the events of Feb. 5th, several volatility linked products have been delisted or deleveraged. We thought now was a good time to take a step back and survey the volatility landscape as it exists today. If you’d like to read a brief summary of the causes of Feb. 5th I recommend my earlier article available here.

Since Feb. 5th, five volatility products have been liquidated and four have had their investment objectives altered. Nomura was the first to announce a liquidation - their Next Notes S&P 500 VIX Short-Term Futures Inverse Daily Excess Return Index ETN (Ticker: 2049.JP) on Feb. 5th - followed the next day by Credit Suisse and their popular VelocityShares Daily Inverse VIX Short-Term ETN (Ticker: XIV). [1] Both of those products offered investors 1x daily inverse exposure to the S&P 500 VIX Short-Term Futures Index (Ticker: SPVXSP), and both lost more than 95% of their value on Feb. 5th. The fallout continued, and in June UBS announced the liquidation of three of its volatility based strategy ETNs, the VelocityShares Short Volatility Hedged ETN, the VelocityShares VIX Tail Risk ETN, and the VelocityShares VIX Variable Long/Short ETN (Tickers: XIVH, BSWN, and LSVX) all having lost considerable value in February, but perhaps more importantly, having failed to attract significant investment interest. [2]

But retiring VIX Exchange Traded Products (ETPs) is not a new thing, and the thinning out of the VIX ETP market is probably a good thing for the volatility market as a whole. A month before Feb. 5th Barclays announced the closure of its iPath Inverse S&P 500 VIX Short-Term Futures ETN (Ticker: IVOP) and iPath Inverse S&P 500 VIX Short-Term Futures ETN (Ticker: XXV). [3] Both products having failed to gain much traction. A couple of years earlier, AccuShares liquidated their Spot CBOE VIX Up Shares and Down ETFs (Tickers: VXUP and VXDN) and Citi closed its C-Tracks Citi Volatility Index Total Return ETF (Ticker: CVOL). Those three products were conceptually impressive, but seemingly too complicated for most VIX ETP traders.

The two short dated VIX products that did survive Feb. 5th were later deleveraged. The ProShares Short VIX Short-Term Futures ETF (Ticker: SVXY) - offering very similar exposure to XIV, but fairing slightly better during its Feb. 5th end of day rebalance - lost 90% of its value but survived liquidation. While it did survive, its sponsor quickly decided to deleverag its exposure from -1x to -0.5x of the SPVXSP index. UVXY, the previously 2x leveraged long volatility ProShares ETF was also deleveraged from 2x of the SPVXSP index to 1.5x. While these decisions were reported as being in the ‘best interests of the funds and their shareholders’, the rising cost of futures margin after Feb. 5th probably meant ProShares was no longer able to maintain the larger exposure in the funds. [4]

Two less popular funds – VMAX and VMIN – were deleveraged too, although in a way that seems less understood by the market. Instead of the blend of short dated ETPs and weekly VIX futures they had offered in the past, the new funds now take long and short positions in VIX futures that are three, four, and five months out.

So where does that leave us now? How can a risk seeking volatility ETP trader or keen volatility investor get best access to the volatility market? Well fortunately there are still several other products out there either unphased by the events of February or even benefiting from it.

At the most turbo charged end of the market are the leveraged VIX products – particularly the VelocityShares Daily 2x VIX Short Term ETN (Ticker: TVIX) and the now slightly deleveraged UVXY ETF introduced above. Both products still command almost half a billion dollars of AUM each, and both performed extremely well on Feb. 5th.

Leveraged Volatility ETPs [5]

Ticker Name AUM (m) Vehicle Type

TVIX VelocityShares Daily 2x VIX Short Term ETN $454.2 Note

UVXY ProShares Ultra VIX Short-Term Futures ETF $435.2 ‘33 Act Partnership

TVIZ VelocityShares Daily 2x VIX Medium Term ETN $4.5 Note

On the unleveraged long side, the Barclays’ iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX and VXXB see footnote) continues to dominate the market with $900M under management, and a liquid chain of available options. [6] The ProShares VIX Short-Term Futures ETF (Ticker: VIXY) is doing well too, with more than $115m under management, and the ProShares product makes a useful fund based alternative to Barclays’ VXX note – remember how funds don’t carry the same credit risk associated with notes!

Long Volatility ETPs [7]

Ticker Name AUM (m) Vehicle Type

VXX iPath S&P 500 VIX Short-Term Futures ETN $765.4 Note

VXXB iPath Series B S&P 500 VIX Short-Term Futures ETN $125.9 Note

VIXY ProShares VIX Short-Term Futures ETF $115.7 '33 Act Partnership

VIXM ProShares VIX Mid-Term Futures ETF $18.9 ‘33 Act Partnership

VXZ iPath S&P 500 VIX Mid-Term Futures ETN $15.4 Note

VXZB iPath Series B S&P 500® VIX Mid-Term Futures ETN $11.0 Note

VIIX VelocityShares Daily Long VIX Short-Term ETN $8.2 Note

EVIX VelocityShares 1X Long VSTOXX Futures ETN $3.8 Note

VMAX REX VolMAXX Long VIX Futures Strategy ETF $2.6 ‘40 Act Fund

VIIZ VelocityShares Daily Long VIX Medium-Term ETN $2.3 Note

On the short volatility side, investors seem to be cautiously optimistic that the short vol trade will return. [8] SVXY, after peaking at almost $1.7Bn on Feb. 1st before falling to $72m on Feb. 5th, has quickly recovered to almost $600m despite having its leverage to the SPVXSP Index cut in half. Its medium term cousin, the VelocityShares Daily Inverse VIX Medium Term ETN (Ticker: ZIV) has also recovered well, with almost $150m of AUM.

Short Volatility ETPs [9]

Ticker Name AUM (m) Vehicle Type

SVXY ProShares Short VIX Short-Term Futures ETF $526.6 ‘33 Act Partnership

ZIV VelocityShares Daily Inverse VIX Medium Term ETN $136.5 Note

EXIV VelocityShares 1X Daily Inverse VSTOXX Futures ETN $18.3 Note

VMIN REX VolMAXX Short VIX Futures Strategy ETF $11.1 ‘40 Act Fund

Something worth remembering however is that most of the products mentioned here are designed specifically for sophisticated investors only, and are designed for very short term holding periods. Credit Suisse in their TVIX prospectus for example states that the notes are ‘…intended to be trading tools for sophisticated investors to manage daily trading risks’ and that ‘The ETNs are only suitable for a very short investment horizon.’ [10] ProShares make similar points in their UVXY prospectus stating ‘…investors holding Shares of the Ultra Fund and the Matching Fund beyond short-term periods have an increased risk of losing a substantial portion of their investment…’. [11] It goes on to point out that ‘Shareholders who invest in the Geared Funds should actively manage and monitor their investments, as frequently as daily.’ [12] So if you’re an investor and not an active trader what are the choices for you in the volatility market?

One option might be a volatility based mutual fund. There are presently three funds with a primary focus on volatility: Measured Risk Portfolios’ Measured Risk Strategy Fund (Tickers: MRPAX and MRPIX), ABR’s Dynamic Mutual Funds’ Dynamic Blend Equity & Volatility Fund (Tickers: ABRVX and ABRTX), and ABR’s Dynamic Short Volatility Fund (Tickers: ABRSX and ABRJX). The funds have performed as you might expect from long and short volatility strategies, with the long/short volatility funds MRPAX/MRPIX and ABRVX/ABRTX both benefiting from the volatility spike of Feb. 5th, and ABR’s short volatility focused fund ABRSX/ABRJX performing better in the last few months than in the first quarter.

Volatility Mutual Funds [13]

Ticker Name AUM (m) Vehicle Type

ABRVX/ABRTX ABR Dynamic Blend Equity & Volatility Fund $25.0 Mutual Fund

MRPAX/MRPIX Measured Risk Strategy Fund $12.7 Mutual Fund

ABRSX/ABRJX ABR Dynamic Short Volatility Fund $4.5 Mutual Fund

But there are other options available too. Despite VelocityShares recently closing several of their volatility strategies – including the quirky but somewhat popular XIVH - a couple of other strategy ETNs do look like they might be aimed at investors rather than just traders. The Barclays ETN + S&P VEQTOR (Ticker: VQT) for example is an ETN that dynamically allocates to a mixtures of equity, volatility, and cash – specifically the S&P 500 Total Return Index and the S&P 500 VIX Short-Term Futures Index. However, with lackluster performance this year, just $25m under management, and a lack of trading activity, it would seem investors may be put off by the relative complexity of dynamic volatility products.

Another is the iPath S&P 500 Dynamic VIX ETN (Ticker: XVZ). The XVZ divides its exposure between the short-term and medium-term VIX futures indexes using signals from implied forward volatility in the S&P 500. Despite a promising level of sophistication, the note has performed quite poorly since inception and has attracted only $13m in AUM.

Strategy Volatility ETPs [14]

Ticker Name AUM (m) Vehicle Type

VQT Barclays ETN + S&P VEQTOR ETN $24.60 Note

XVZ iPath S&P 500 Dynamic VIX ETN $13.10 Note

The CBOE has also sought to improve the inevitability of their own volatility products. The latest, the CBOE Capped VIX Premium Strategy Index (Ticker: VPN) is an index based on selling VIX futures and buying VIX calls. [15] While there is no news of an ETP being listed on it, CBOE’s move to create more indexes that use their own products may be driven by an issuer’s interests.

A final option is to find a financial advisor with in-depth volatility expertise and knowledge. Invest In Vol (IIV) is a boutique asset manager focused exclusively on volatility investing. IIV is a Registered Investment Advisor with fiduciary responsibility to manage volatility investments for retail, advisor, and institutional clients alike. Unlike hedge funds that restrict their offerings to high net worth accredited investors, IIV’s separately managed accounts are available to a far wider audience, offering retail investors and advisors the same access as large funds and institutional investors. If you’d like to read more about volatility investing through Separately Managed Accounts I recommend my article here.

Ultimately volatility investing is complicated, and Feb. 5th has demonstrated just how risky it can be. Strategy ETPs like VQT and XVZ have proved complicated to explain and seemingly unpopular with investors and VIX mutual funds have to date proved slow at realizing strong returns - possibly due to their risk averse approach. Hedge Funds are far too exclusive and offer too little transparency and liquidity. Separately managed accounts managed by a fiduciary may offer investors the simplest access to volatility returns available today.

[1] Link

[2] Link

[3] Link

[4] Link

[5] All ETF and ETN data from as of June 26, 2018.

[6] As notes approach expiry it is common for issuers to launch a new series offering the same exposure but with a longer dated expiry. VXXB is the next series of VXX expiring in 2048 instead of 2019.

[7] All ETF and ETN data from as of June 26, 2018.

[8] Link

[9] All ETF and ETN data from as of June 26, 2018.

[10] Link

[11] Link

[12] Link

[13] All Mutual Fund data from MorningStar as of June 26, 2018.

[14] All ETF and ETN data from as of June 26, 2018.

[15] Link


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Past performance does not guarantee future results. This information has been provided by Invest In Vol. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment-making decision. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. The views and opinions expressed are those of the author at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. Investments are subject to change without notice.

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Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. Carefully consider the investment objectives, risk factors, charges and expenses before investing. Invest In Vol, LLC is the investment advisor for the separately managed accounts (SMAs) and advisory services; it provides investment advisory services to clients and does not sell securities. For a more complete disclosure & definitions click here. For a more complete description of our business, Form ADV 2A, and accompanying brochures, click here.

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