There’s news that new VIX trading products are on the horizon. I’d steer clear for a variety of of reasons.
First, as IndexUniverse points out, taxes.
Second — complexity and confusion. It’s pretty clear that the iPath ETNs are going to be based on VIX futures, which means you’ll be tracking the futures, not the VIX itself. As I’ve said before, and as Adam Warner succinctly points out, there is a big difference between the actual VIX and the futures that are based on it. If you aren’t aware of the trading behavior of VIX futures, don’t even bother with these. And if you don’t think it’s confusing, realize that even the writer and editors of IndexUniverse, who have nothing to do but write about index products, got it bass-ackwards. For in the third paragraph, they drop this little gem that perpetuates the myth that these things will actually track VIX, saying the ETNs ”will track the Chicago Board Options Exchange’s Volatility Index.” That’s simply not true. They’ll track the futures, and that’s a very important difference. Take my word for it.
Finally, these are ETNs, not ETFs. That too is an important difference, as Morningstar and IndexUniverse point out. You’re not buying something that actually has stuff in it. You’re buying an unsecured promissory note from a bank, and that bank promises to pay you some amount based on an index. Now the ETN will probably have VIX futures in it. But in reality, when you buy one of these things, you become an unsecured creditor of the bank. Barclays (BCS) stock is down in option price territory … less than $4.
In sum, you’re investing money into an unsecured promissory note, backed by a bank that is getting crushed. The note is far more confusing and complex than you probably realize, and the tax consequences are in flux.