iPath has launched another exchange-traded note offering inverse exposure to an index comprised of VIX-related futures contracts, rolling out the January 2021 Inverse S&P 500 VIX Short-Term Futures ETN (IVO). The new product is substantially similar to the Inverse S&P 500 VIX Short-Term Futures ETN (XXV) that launched in July of last year. Both ETNs are linked to the inverse performance of the S&P 500 VIX Short-Term Futures Index Excess Return. That benchmark offers exposure to a daily rolling long position in the first and second month VIX Index futures contracts, rolling exposure to the underlying futures contracts continuously throughout each month and targeting a constant weighted average maturity of one month.
In addition to a different inception date, IVO will be different from the existing iPath product in terms of maturity date and final valuation date. A Barclays press release noted that “the two series of ETNs are not fungible with one another.” The two series of ETNs will also maintain different “participation values,” which the prospectus notes is intended to approximate the ratio of (1) the value of the notional exposure per ETN of a series to the performance of the Index relative to (2) the value of each ETN of that series.
|Index||S&P 500 VIX Short Term Futures Index Excess Return (-100%)||S&P 500 VIX Short Term Futures Index Excess Return (-100%)|
|Participation ( as of 1/14/2011)||0.91||0.17|
Interest in exposure to volatility has surged over the last several years, thanks in part to the introduction of several exchange-traded products offering exposure to this once hard-to-reach asset class. The addition of IVO makes 15 products in the Volatility ETFdb Category, most of which are linked to indexes comprised of futures on the VIX (Citi’s CVOL offers exposure to another measure of volatility). Aggregate assets in volatility ETPs now top $2 billion, most of which is in the iPath S&P 500 VIX Short-Term Futures ETN (VXX).
ProShares recently introduced the first VIX ETFs, VIXY and VIXM. The other 13 products offering exposure to volatility are structured as exchange-traded notes, meaning that investors are exposed to the credit risk of the issuing institution. VelocityShares and iPath have both rolled out leveraged volatility ETNs, while UBS recently launched an interesting long/short VIX product that partially offsets a long position in mid-term futures with a short position in contracts that are closer to expiration.
Because the ETPs in the Volatility ETFdb Category are linked to indexes consisting of futures contracts, prices won’t change in lock step with the spot VIX. Additionally, because the VIX futures curve is often in steep contango, the “return drag” caused by rolling exposure can be significant; VXX lost more than 70% of its value in 2010, while the spot VIX lost less than 20%.
XXV has accumulated about $40 million in assets since its launch last year, thanks in part to a stellar performance. Since August 2010, XXV has gained more than 40%. During that same period, XXV lost about 60% of its value while the spot VIX declined by about 30%. XXV essentially seeks to exploit the steep contango in futures markets, as evidenced by the delta between the change in the spot VIX and the return generated by the ETN. Thanks to the daily reset feature of the inverse ETNs, the return generated is less than the loss incurred by VXX.
Disclosure: No positions at time of writing.
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