ETF Trends
ETF Trends

ETF Spotlight on the Barclays S&P 500 Dynamic VEQTOR ETN (NYSEArca: VQT), part of an ongoing series.

Assets: $373.8 million.

Objective: VNQ is an exchange traded note. Shares of the ETN are senior, unsecured debt securities linked to the performance of the S&P 500 Dynamic VEQTOR Total Return Index, which provides a heavy emphasis on the U.S. equity market during periods of low market volatility and a greater allocation to investments that track implied volatility during periods of high market volatility. Additionally, it may move the entire holding to cash if the performance of the previous 5 business days drops by 2% or more.

Holdings: The fund may alternate holdings between the S&P 500 Total Return Index and the S&P 500 VIX Short-Term Futures Total Return Index, or hold interest-bearing cash investments. [Caveat Emptor – Volatility ETFs]

What You Should Know:

  • Barclays is the issuer of this exchange traded note.
  • The issuing bank has a S&P credit rating of A+ and a Moody’s rating of AA3.
  • Exchange traded notes are unsecured debt obligations subject to the credit worthiness of the issuing bank.
  • If the bank goes under, there is a chance the investor may not receive his or her principle back.
  • VQT has an expense ratio of 0.95%.
  • The ETN can shift between target equity and volatility index allocations based on 1-month realized volatility in the S&P 500 Index, along with the 5-day and 200-day moving averages of the VIX Index.
  • For instance, in a realized volatility environment of less than 10% and an implied volatility downtrend, the fund may allocate 97.5% in equities and 2.5% in VIX futures.
  • If the realized volatility environment rose above 45% during an implied volatility uptrend, the equities allocation would drop to 60% and VIX allocations would increase to 40%.
  • The fund is down 3.2% over the past month, down 2.9% over the last three months and up 2.3% year-to-date.
  • In a hypothetical comparison between the ETN and the S&P 500 since 12/20/05, the S&P 500 returned 3.5%, whereas the VEQTOR Index returned 11.7%.
  • The VEQTOR Index has a 61.4% correlation to the S&P 500.
  • The ETN is 1.2% above its 200-day exponential moving average.
  • It should be noted that the fund is trading at a premium around 0% to its indicative net asset value.
  • “VQT is a unique alternative strategy that seeks to reduce portfolio volatility through dynamic asset allocation,” according to Morningstar analyst Timothy Strauts. “The overall effect is a portfolio with below-average risk that can actually rise in a down stock market.”
  • “While the ETN has performed well in its short existence, it may not always do so well,” Strauts cautioned. “For example, the strategy will not protect against a sudden spike in volatility such as a natural disaster or act of war. When these events occur, the equity market is likely to drop abruptly and the VIX rise suddenly.”

The Latest News:

  • As a response to the 2008 depression and the heightened market volatility, demand for alternative investments that generate consistent returns has increased, writes Strauts for Morningstar.
  • “One of benefits of the dynamic allocation strategy is that it reduces portfolio risk,” Strauts said. “Over the past one-year period, the S&P 500 has had a standard deviation of 16%, while VQT has had a standard deviation of only 12%. For slightly lower returns investors got a portfolio with 25% less risk.”
  • Currently, the election results in Greece and France may bring a new period of uncertainty for financial markets, similar to how the Eurozone affected U.S. markets last summer, reports Edward Krudy for Reuters.
  • However, some observers note that the Eurozone problems are already priced in the market and we will now wait for any potential upside in the direction the new leaders may take.
  • “We have seen this movie about 15 times, we should be ashamed of ourselves to fall for the same movie three years in a row,” Ken Fisher, founder of Fisher Investments, said in the article. “If this isn’t priced in, I don’t know what is.”

Barclays S&P 500 Dynamic VEQTOR ETN

For past stories in this series, visit our ETF Spotlight category.

Max Chen contributed to this article.

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.