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David Fry writes a subscription newsletter focused on technical analysis of exchange-traded funds, called ETF Digest (www.etfdigest.com). Dave founded the ETF Digest in 2001 and was among the very first to see the need for a publication that provided individual investors with information and... More
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  • ETFs Vs ETNs - VXX Vs VIX  1 comment
    Mar 22, 2012 3:26 PM | about stocks: VXX, UVXY

    With the explosion of ETFs (Exchange Traded Funds) as trading mechanisms, it's no wonder that ETFs would develop into the realms of the absurd.

    Like a bad spin-off from a '70s sitcom, ETFs spun off into ETNs (Exchange Traded Notes). The difference between the two is radical.

    An ETF value is based on the price of its underlying holdings (like a mutual fund). The capital of the fund is secured by the value of the stocks held in the fund. An ETN is an unsecured, unsubordinated debt security with significant basis on the credit rating of the issuer. Although ETNs may be named to indicate tracking certain futures markets or indices, due to the fact that their holdings are credit notes rather than tangible assets, such as ETFs, their price becomes largely supply and demand based rather than based on underlying holdings. ETNs were originally developed to function in bond markets similarly to ETFs in equities markets. Presumably that should work because a bond, although a credit instrument, has an actual tangible monetary value.

    Where ETNs went haywire was attempting to track indices not based on a monetary value. The Volatility Index (VIX) is a classic example. The VIX is a measure of options contracts traded on the S&P 500 over a 30 day period. It has no monetary value. It would be like trying to assign a dollar value to the numbers on a thermometer.


    Stocks: VXX, UVXY
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  • untrusting investor
    , contributor
    Comments (9903) | Send Message
    Good article. Yes, TVIX was crushed today. The shorts likely made $125-150 million on it in one day alone. Hard to beat that.


    Ain't that amazing. We consult with a highly successful and profitable mid-sized business and that's just about 20+ years of their payroll.
    22 Mar 2012, 08:56 PM Reply Like
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