Although investors have seen a few ETF launches in the past couple of days, mass closures have also been hitting the market as well. First FocusShares and Russell announced that they would be shuttering the vast majority of their products (only Russell kept alive a single fund), while now the trend appears to be hitting the ETN world as well.
ETRACS, the ETN brand from UBS, appears to be on the verge of shutting down its relatively unpopular VIX ETN lineup, giving the axe to a dozen products in total. All twelve of these notes were relatively new on the market and gave investors exposure to either short or long exposure in the volatility market on a monthly basis making them relatively unique in the ETP world (see more in the Zacks ETF Center).
The products provided investors with targeted exposure to a certain month along the volatility curve, theoretically helping investors to focus in on a particular level of the VIX. Additionally, the inclusion of both short and long versions allowed investors to go long in a particular month and then short a different one, playing possible trends in the market in an easy way.
Yet despite this, none of the products really caught on among investors as the most popular only had about $16 million in AUM. This fund though saw volume below 2,000 shares a day suggesting incredible bid ask spreads, a situation that becomes even worse when looking at the even less popular ETNs in this family (see Are The Trendpilot ETNs Better Than Broad Market ETFs?).
For example, the one month long version, VXAA, saw average volume of about 500 shares in a normal session and with an average trade size of 250 shares (according to XTF.com) which means that roughly two trades a day were taking place in the product. Obviously this kind of disinterest couldn’t go on forever and something was going to give sooner or later in this unpopular segment.
Below, we have listed the notes which will be closing to new investors, effective today, September 7th 2012. UBS AG will then pay out to investors who were still in the security a cash payment at the end of business on September 12th.
Long 1-Month S&P 500 VIX Futures ETN (VXAA)
Short 1-Month S&P 500 VIX Futures ETN (AAVX)
Long 2-Month S&P 500 VIX Futures ETN (VXBB)
Short 2-Month S&P 500 VIX Futures ETN (BBVXF)
Long 3-Month S&P 500 VIX Futures ETN (VXCC)
Short 3-Month S&P 500 VIX Futures ETN (CCVX)
Long 4-Month S&P 500 VIX Futures ETN (VXDD)
Short 4-Month S&P 500 VIX Futures ETN (DDVX)
Long 5-Month S&P 500 VIX Futures ETN (VXEE)
Short 5-Month S&P 500 VIX Futures ETN (EEVX)
Long 6-Month S&P 500 VIX Futures ETN (VXFF)
Short 6-Month S&P 500 VIX Futures ETN (FFVX)
Despite this sudden rash of closures, investors should note that the company isn’t giving up on the volatility space entirely. Instead, the company will keep open its most popular volatility ETN the Long-Short S&P 500 VIX Futures ETN (XVIX).
This product isn’t exactly the most popular with under $20 million in AUM, but it does have a little more respectable 10,000 shares in daily average volume. The product also has a much more unique focus as it takes a 100% long position in mid-term futures and then uses a 50% short position in short-term futures (see ETFs vs. ETNs: What’s The Difference?).
This technique looks to capitalize on the steepness of the short end of the VIX curve, potentially allowing investors to profit in the process while also providing uncorrelated returns as well. The strategy has had mixed results in recent months as it has gained about 4.6% in the previous half year period, although it should be noted that XVIX has outperformed the S&P 500 over the trailing one month time frame.
Other VIX ETF options
Despite the loss of the VIX ETNs, there are plenty of choices still out there for investors looking to tap into the volatility market, albeit using less granular products. Easily the most popular is the iPath S&P 500 VIX Short Term Futures ETN (VXX) although both UVXY and TVIX offer leveraged exposure and trading volumes above one million shares a day as well (see ETF Investors: Beware The Coming ETN Backlash).
Given that even with these losses there are still more than 20 VIX-focused ETNs on the market, the loss of these UBS products shouldn’t be too hard for investors to swallow. Clearly, the VIX market is reaching its limits in terms of proliferation and this once extremely crowded market is finally starting to see some much needed contraction, a situation that shouldn’t really be of any alarm to those who are worrying about the recent run of ETF closures that have been hitting the market.
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