After announcing the automatic termination last week of the Inverse January 2021 S&P 500 VIX Short-Term Futures ETN (IVO), iPath was quick to roll out a successor fund that will maintain a generally similar investment objective. Monday marked the first day of trading for the Inverse S&P 500 VIX Short-Term Futures ETN (IVOP), which will offer inverse exposure to an index comprised of daily rolling positions in first and second month VIX futures contracts.
The new ETN will mature in September 2021, and will also feature an automatic redemption trigger at $10 per share (shares in IVOP began trading at $20). IVO hit the $10 level last week, triggering a redemption of the notes by Barclays. Earlier this year, Barclays also redeemed its Long Enhanced S&P 500 VIX Mid-Term Futures ETN and subsequently issued VZZB, which offers generally similar exposure.
Under The Hood: Inverse VIX ETFs
The new ETN will offer inverse exposure to an index comprised of first and second month VIX futures contracts. Direct investments in the VIX, a widely followed indicator of equity market volatility, are not possible. But in recent years investors have embraced ETFs and ETNs as a way to tap into this alternative - but potentially powerful - asset class. Because the VIX often spikes when stock markets tumble, exposure is potentially useful as a hedge against slides in stocks or as a way to bet on market turbulence. Conversely, products such as IVOP tend to exhibit a strong correlation with equity markets.
Like any futures-based strategy, the returns generated by ETPs linked to indexes consisting of VIX futures depend on the slope of the relevant futures curve. Because VIX futures are often in steep contango - especially at the short end of the maturity spectrum - the differences between a hypothetical investment in the spot VIX and products that offer exposure via futures contracts can be significant. Inverse VIX ETPs essentially provide an opportunity to exploit that phenomenon. When futures markets are contangoed, inverse exposure to futures-based indexes can deliver gains even if the underlying benchmark is flat. But there certainly isn’t a free lunch here. Many of the inverse VIX ETPs have been hammered by the recent surge in volatility.
One unique feature of IVOP is the reset mechanism on the inverse exposure offered - or lack thereof. Like many iPath products, IVOP will seek to deliver inverse (i.e., -100%) exposure to its underlying index over the lifetime of the note. That means that the effective leverage offered was -100% at launch, but may deviate from that level. iPath publishes the “participation ratios” for its leveraged ETNs daily, giving investors an idea of the effective leverage that they will receive.
IVOP launched with $4 million in assets. When IVO hit its redemption level last week, the note had close to $30 million in assets. There are10 inverse volatility ETPs in total, with aggregate assets of nearly $500 million.
Similar to its predecessor, the new ETN will charge an annual fee of 0.89% - toward the low end of the range within the Volatility ETFdb Category.
Disclosure: No positions at time of writing.
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