A 200% leveraged exchange traded note designed to track CBOE Volatility Index futures contracts has lost 97% of its value this year and looks to be headed to zero if the VIX continues to fall.
VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) has dropped below $1 a share. The ETN has a market capitalization of $113.5 million.
“Without a reverse stock split TVIX will be eroded down towards zero by contango,” writes Vance Harwood at Six Figure Investing. “If there aren’t any significant volatility spikes TVIX tends to decay around 90% per year, so it will probably take until December before it drops below $1. Once its average price over a 30 day period has dropped below $1 it can be delisted by the NYSE.”
TVIX’s prospectus warns the product is only suitable for a very short investment horizon. It aims to deliver 200% of the daily return of its index. Credit Suisse is the ETN’s issuer.
The long term expected value of the ETN is zero, according to the prospectus. If held as a long term investment “it is likely that you will lose all or a substantial portion of your investment,” it adds.
TVIX and other volatility products are geared to follow VIX futures, not the spot price. Therefore, they can be hurt by contango, or when longer-dated contracts are more expensive than the spot price. This causes the products to lose money on the so-called roll trade.
TVIX faced scrutiny earlier this year when it plunged after its premium to indicative value collapsed following Credit Suisse’s decision to halt the creation of new shares. [What Really Happened with TVIX]
Other volatility exchange traded products include iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY).
VelocityShares Daily 2x VIX Short-Term ETN