Credit Suisse late Tuesday said it has temporarily suspended further issuance of VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) due to internal limits on the size of the exchange traded note.
The ETN is a debt instrument designed to track the performance of futures contracts based on the CBOE Volatility Index, or VIX. [Three Things You Should Know About VIX ETFs]
The note provides a return linked to 200% of the daily performance of the S&P 500 VIX Short-Term Futures Index, minus fees. Some investors use TVIX and other volatility-linked exchange traded products to speculate on market pullbacks or hedge long stock positions. [ETF Chart of the Day: VIX]
Credit Suisse, which issues TVIX, said the suspension may influence the market value of the ETN. It’s important to remember the fund follows VIX futures and not the spot price.
“Credit Suisse believes it is possible that the temporary suspension of further issuances may cause an imbalance of supply and demand in the secondary market for the ETNs, which may cause the ETNs to trade at a premium or discount in relation to their indicative value,” the bank said in a press release. “Therefore, any purchase of the ETNs in the secondary market may be at a purchase price significantly different from their indicative value.”
The VIX, known as Wall Street’s fear index, has dropped below 20 on hopes the second Greek bailout will cool Europe’s debt crisis. [VIX ETFs Bounce on Greek Jitters as Stocks Near 2011 High]
The Credit Suisse announcement on TVIX follows a spike in trading volume in the ETN, which holds more than $600 million in assets.
The VIX and More blog speculates the recent exponential growth in TVIX has violated a position size risk control rule relative to VIX futures products. It’s not clear how long the TVIX issuance suspension will last.
“The big question for investors is whether the suspension of creation units will mean that TVIX trades at a premium or discount to its net asset value. Given that supply is constrained and demand is not, the most likely scenario is that TVIX will trade at least as high as net asset value or possibly at a premium,” the blog reported.
TVIX is “targeted at sophisticated investors looking to manage daily trading risks and was not designed to serve as a passive long-term core holding,” Morningstar analyst Abraham Bailin writes in a profile of the ETN. “The application of daily leverage on a fund held longer than one day can very quickly erode the holdings returns due to the pernicious effects of compounding arithmetic.”
VelocityShares Daily 2x VIX Short-Term ETN
