Traders are gaining more efficient avenues for hedging volatility without the costs associated with futures contracts through two new AccuShares Spot VIX exchange traded funds.
On Tuesday, AccuShares Investment Management brings to market the AccuShares Spot CBOE VIX Up Shares (NasdaqGM: VXUP) and AccuShares Spot CBOE VIX Down Shares (NasdaqGM: VXDN). VXUP will try to reflect the spot price return of the CBOE Volatility Index, or VIX, while VXDN wil try to mirror the inverse of the VIX.
The Volatility Index measures the put and call options for the S&P 500 over a 30-day period and is widely referred to as the “fear gauge” since the VIX typically spikes along with greater volatility, or fear, in the market.
These new ETFs will offer a more reliable way to track and capture market volatility, without the trading costs and structural flaws that other VIX futures-based exchange traded products show.
Current U.S.-listed VIX ETFs and ETNs track VIX futures. Consequently, the VIX products are exposed to the negative effects of contango in the futures market when rolling contracts.
Contango occurs when later-dated contracts trade at higher prices relative to contracts that are close to maturity. For instance, CBOE S&P 500 VIX May 2015 contracts were hovering around 13.85 on Friday, whereas next month CBOE S&P 500 VIX June 2015 contracts were trading at 15.5 and CBOE S&P 500 VIX January 2016 contracts were at 19.0.
Since ETFs have to roll over contracts, or sell those close to maturity, and buy a later-dated contract, these futures-based VIX ETFs would essentially sell low and buy high, losing money on each roll during a contangoed market. [New VIX ETFs Coming]
However, AccuShares, along with Robert Whaley, the father of the VIX, have come up with a different approach with the new Spot VIX products. Instead of holding futures contracts, VXUP and VXDN will hold cash and cash equivalents, such as bills, bonds and notes issued by the U.S. Treasury, to mirror the change in the spot price of the VIX. Share classes increase or decrease in response to daily changes in the spot price. The new proprietary indexing methodology will also cause the ETFs to recalibrate everything on the 15th of every month.
Since the spot VIX ETFs will hold Treasury bills and other fixed-income cash equivalents, investors may also enjoy a small yield. While the monthly distributions may trigger some tax issues, investors would not have to fill out K-1s associated with futures investments but only report taxes on a regular 1099 form.
The two ETFs charge 0.95% per year. Additionally, the long Spot VIX, or VXUP, comes with an additionally 0.15% daily expense to help pay for the short Spot VIX, or VXDN – due to the nature of the VIX, the investment is pretty much guaranteed to go up some time in the future but a short position is also likely to lose money, so the daily fees on VXUP is used to compensate those taking the risk of going short.
The two new spot VIX ETFs may provide a better way to play the Volatility Index, but investors should still consider these investments as tactical trades. Investors should not use these ETFs in a set-and-forget type portfolio since the investments typically require active engagement.
“Investors who do not intend to actively manage and monitor their Fund investments at least as frequently as each distribution date should not buy shares of the Funds,” according to a recent SEC filing.
For more information on new fund products, visit our new ETFs category.