ETF Chart of the Day: Downside Protection

We have been speaking about Volatility linked ETPs quite a bit recently given the recent equity whipsaw, and a newer product to market comes to mind, VIXH (First Trust CBOE S&P 500 VIX Tail Hedge, Expense Ratio 0.60%).

VIXH is not well known yet in the marketplace, as it may go several days without any volume traded, and then potentially see a few sporadic several thousand share trading days. First Trust has an increasing presence as a leading ETF provider, thanks to strong asset growth and performance in several of their more popular products, such as the AlphaDEX suite.

In any case, First Trust definitely does not come to mind when thinking about Volatility based ETPs, but nonetheless they forayed into the arena with the launch of VIXH back in late August of 2012. VIXH to be specific is classified in the “Volatility Hedged Equity” sub-category, where larger funds in the space that may be more familiar include VQT (iPath Barclays ETN+ S&P VEQTOR ETN, Expense Ratio 0.95%) and PHDG (PowerShares S&P 500 Downside Hedged Portfolio, Expense Ratio 0.40%) which have $634 million and $391 million in assets under management respectively.

VIXH happens to be the smallest product in this sub-category actually, with only about $5.8 million in AUM and as we mentioned, scant trading interest currently. In any case, what exactly does VIXH set out to do? It tracks the CBOE VIX Tail Hedge Index which as presented in fund literature “consists of each equity in the S&P 500 (with dividends reinvested), and an amount of one-month call options on the VIX Index that is determined by the level of forward volatility.

On the day of the monthly expiration of VIX options, previously purchased VIX calls are cash-settled and new VIX calls are purchased by the index at the 10:00 AM Central Time asking price. The percent of money allocated to VIX calls depends on the level of forward volatility of the S&P 500 at the next call expiration as measured by the opening price of VIX futures with the same expiration as the calls as follows…” and so on.

Managers and institutions should do an ample amount of due diligence when evaluating products in this space simply because the “devil is in the details” in many cases, and no product in this category is created equally to the next.