Jefferies Asset Management is best known in the ETF space for its funds focusing on equities of commodity producers and companies engaged in commodity-intensive businesses. The Connecticut-based issuer has filed to offer the Jefferies S&P 500 VIX Short-Term Futures ETF (VIXX), a product that would seek to replicate the performance of a benchmark comprised of futures on the CBOE Volatility Index, or VIX.
The VIX, known to some traders as the “fear index,” is designed to estimate expected volatility in large cap U.S. stocks over the next 30 days by averaging the weighted prices of call and put options on the S&P 500. The VIX has historically traded near a value of 20, but spiked to above 80 during the recent financial crisis. Since hitting an all-time high in late 2008, it has slowly retreated towards its long-term average.
VIXX could become the first ETF to offer exposure to equity market volatility, although two exchange-traded notes (ETNs) from Barclays iPath already cover this space. The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) is linked to a rolling index consisting of near month and second month futures contracts on the VIX, while the Mid-Term Futures ETN (NYSEARCA:VXZ) is linked to a benchmark made up of fourth-, fifth-, sixth-, and seventh-month futures contracts.
Since they were launched in January 2009, VXX and VXZ have been two of the worst performing ETFs, but also among the most popular. VXX has lost about 80% over the last year, although it spiked nearly 10% in Tuesday trading after turmoil in Europe sent global equity markets plummeting. The slide in VXX has been driven by two powerful factors, including a slide in the underlying VIX index and steep contango in VIX futures markets. Second month VIX futures contracts often trade as much as 15% higher than near month futures, creating strong headwinds for investors in these products (see Three ETFs That Could Be Crushed By Contango).
This contango makes VIX-based exchange-traded products unattractive for long-term investors, but the VIX ETNs from iPath have been big hits with investors seeking an insurance policy against turmoil in stock and bond markets. The correlation between VXX and SPY has been close to -1.0 since launch, making VXX a valuable tool for investors looking to smooth out bumps and add some real diversification to a traditional stock-and-bond portfolio. At the end of March, VXX and VXZ had assets of about $1.2 billion and $470 million, respectively. The two products took in about $1.3 billion in cash inflows in the first quarter (see VXX: The New UNG?).
Similar, But Different
VIXX would be similar to VXX, but different in a few key areas. First, VIXX would be structured as an ETF, meaning that its underlying holdings would consist of futures contracts (and potentially other instruments). VXX, on the other hand, is an exchange-traded note; a senior, unsecured debt security issued by Barclays Bank that is subject to credit risk. Another big difference between the proposed VIXX and the existing VXX is the fee structure; the Jefferies product would charge an expense ratio of just 0.49%, or 40 basis points lower than the iPath products.
Disclosure: No positions at time of writing.