Volatility ETFs Thrive in Traders’ Market

August 3rd at 11:49am by John Spence

Exchange traded products that follow CBOE Volatility Index futures have provided investors with opportunities to profit from stock pullbacks and hedge portfolios during the market’s recent dramatic swings.

The largest such offering is iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) with a market capitalization of $1.2 billion. The exchange traded note was launched in early 2009 shortly before the stock market bottomed after the credit crash. Since then, it has lost nearly all its value during the historic bull rally and has also been hurt by negative “roll yield” due to contango in VIX futures — when longer-dated contracts are more expensive than the spot price.

The iPath S&P 500 VIX Short-Term Futures ETN charges a yearly fee of 0.89%, according to issuer Barclays.

There are several exchange traded products for VIX futures, including leveraged and inverse funds. [Capitalizing on Market Volatility With VIX ETPs]

VelocityShares, which manages six products, has been making inroads in the volatility-linked category. The VIX is Wall Street’s so-called fear gauge and rises when investors are seeking protection in the options market.

The firm’s most popular vehicles are VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV) and VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX).

The company has quickly gathered $550 million in assets, or about 25% market share in the VIX space, said VelocityShares co-founder and chief investment officer Nick Cherney in a telephone interview Wednesday.

He said some traders are tapping VelocityShares Daily Inverse VIX Short-Term ETN in an attempt to profit long term from contango and negative roll yield. Still, moves higher in the VIX could overwhelm contango, Cherney added. The ETN is an inverse product that tends to rise when the VIX falls.

VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX)

Chart source StockCharts.com.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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