The steep declines over the past week in two exchange traded products that saw hefty premiums collapse are another reminder that investors always need to understand what they’re buying.
Two exchange traded notes — VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) and iPath Dow Jones-UBS Natural Gas ETN (NYSEArca: GAZ) – have sold off as their premiums to net asset value have been unwound.
Premiums had built up in the products after the ETNs suspended the creation of new shares. TVIX resumed new share issuance last week. [TVIX Fallout Lingers for Volatility Products, ETNs]
Essentially, the ETNs were trading similar to closed-end funds because stopping the creation of new shares the hindered market makers’ ability to arbitrage away any differences between the share price and the net asset value.