New ETN Will Give Investors Access to Volatility | ETF Trends

Barclays has just announced that it filed the necessary paperwork to launch a pair of exchange traded notes (ETNs) that will track the increasingly well-known Chicago Board Options Exchange’s Volatility Index, or the VIX.

Characteristics of ETNs. For those of you who don’t know, the VIX measures volatility and is a good gauge in investor sentiment.  These new ETNs will charge net fees to investors of 0.89% per year, trade on the NYSE Arca exchange and will continuously rollover contracts.

How They Work. The iPath S&P 500 VIX Short-Term Futures and the iPath S&P 500 VIX Mid-Term Futures will continuously roll over contracts. The short-term fund will trade one- and two-month VIX futures. CBOE has only been offering VIX futures since March 2004. The VIX has a strong negative correlation with stocks, as witnessed at the height of market volatility late last year.

Drawbacks of ETNs. The ETNs will enable the delivery of an investable portfolio accessible on a daily basis to retail markets; however, they come up with a price.  One such risk is taxes.  These notes will be considered as prepaid contracts and will not get tax preferences, states Murray Coleman of Index Universe.  In layman’s terms, this means that investors will be subject to capital gains taxes if held outside of sheltered accounts.  Additionally, because these are being issued as notes, they will represent unsecured debt for anyone purchasing the ETNs.

With the current lead time of filing new notes and funds, it seems like it will be a while before these notes hit the market, but when they do, investors will have another tool to add to their arsenal.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.