Father of VIX Options Enters ETF World with AccuShares

March 24th at 8:00am by Tom Lydon

In 1993, the year the first U.S. ETF was launched, there was also another monumental introduction.

Robert Whaley was an established expert in derivative contract valuation and risk management.  In 1993, Whaley developed the CBOE Market Volatility Index “VIX” for the Chicago Board Options Exchange. He went on to create the NASDAQ Market Volatility Index “VXN” in 2000 and the BuyWrite Monthly Index “BXM” in 2001. He also co-developed the NASDAQ OMX Alpha Indexes.

Whaley is not only the director of Financial Markets Research Center at Vanderbilt University, but also a partner in a new ETF company, AccuShares.

AccuShares filed a registration statement with the Securities and Exchange Commission to issue shares of 7 exchange traded funds (“ETFs”).   The first ETF expected to be offered, the AccuShares Spot CBOE® VIX Fund, is designed to provide exposure to the CBOE Volatility Index.

Today, several ETFs seek to track performance of the VIX. The formula uses a “kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The goal is to estimate the implied volatility of the S&P 500 index over the next 30 days.”

Although Whaley couldn’t comment on the newly registered ETFs, he did offer up this regarding the current VIX related ETFs and ETNs:

“There’s room for improvement. Most people who use them don’t understand that when they buy them, they aren’t really getting a position in the VIX. It’s a bit disheartening. They are funds pegged to the vix s&p 500 indices and lose money because of contango in the futures market. That’s kind of scary,” Whaley said in an interview with ETF Trends.

“People are buying and holding these for an extended period of time. They were meant to be used for positions in intraday volatility and should be sold by the end of the day. But, you can tell that the shares are held for much longer periods exposing investors to additional costs. Institutional holding are very small so retail investors must be holding on for far too long. My calculations show that over $4 billion has been lost by investors who have been long these products since they were launched,” he added.

Room for improvement is creating something that behaves like the VIX and that can happen.

“We’ve heard that market makers and institutions are very interested in being able to access more accurate pricing and liquidity. This would open up buy and hold strategies by institutions, which make a great deal of sense as a portfolio hedge, even though the correlation is hugely negative. If you can get something that behaves like VIX it opens up opportunities. Pension funds and endowments would be able to offered a huge diversifier,” said Whaley.

AccuShares products are designed to provide exposure to key alternative asset classes,  including volatility, energy,  and commodity products. The firm was founded by Jack Fonss, Ned Cataldo and Forrest Gilman.

In addition to Whaley, ETF industry veteran, Richard Goldman is also a partner in the firm. Goldman, was CEO of Rydex Investments and subsequently COO of Guggenheim Investments following the Guggenheim acquisition of Rydex.

The remaining ETFs are designed to provide commodity price exposures as measured by the S&P GSCI® Spot and some of its sub-indices.

These ETFs are:

  • AccuShares S&P GSCI Spot Fund
  • AccuShares S&P GSCI Agriculture and Livestock Spot Fund
  • AccuShares S&P GSCI Industrial Metals Spot Fund
  • AccuShares S&P GSCI Crude Oil Spot Fund
  • AccuShares S&P GSCI Brent Oil Spot Fund
  • AccuShares S&P GSCI Natural Gas Spot Fund

Each ETF is designed for investors seeking cost-effective, targeted and transparent exposure to various spot and spot proxy prices represented by the ETF’s Underlying Index. AccuShares intends to offer 2 Classes of Shares in each ETF, one designed for investors with a positive view of future index performance and one designed for investors with a negative view of future index performance, according to a statement.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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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