Why UBS Decided To Deep-Six Its VIX ETNs


UBS jettisoned 12 hyper-specific VIX products on Monday. Why?

VIX ETFs and ETNs have roughly $3.3 billion in assets all told. So clearly there’s some interest in the space.

VIX products are often used to profit from investor fear, or to hedge against equity downdrafts. Our current environment is hardly fear free, but still, these UBS ETNs gathered little interest.

True enough, the VIX index itself is quite low at present.

But in my view, these products weren’t really designed as volatility plays. Instead, they existed as very sharp tools to be used in combination for making precise short-term bets on the shape of the VIX futures curve.

Here’s a snapshot of that curve as of Sept. 11, and the data is courtesy of the CBOE website.

View photo

VIX Term Structure

The graph shows steep contango, meaning that futures contracts settling some months away cost more than those that settle sooner. The VIX term structure is in contango most of the time, though the exact shape changes frequently.

The UBS VIX suite of products allowed people to speculate on changes in this curve by providing exposure to six different points on the curve with both long and short exposure at each of these points.

The idea was that smart and brave traders would want these finer tools to make their bets beyond the existing products that focus on only one- and five-month exposure.

The challenge these products faced was in gathering the liquidity that traders require. Someone making a bet of, say, long four-month and short two-month VIX futures exposure is going to want the ability to move in and out of that position quickly and without excessive costs.

All ETFs and ETNs face this liquidity challenge, even those with buy-and-hold investment strategies. The recent demise of FocusShares funds underscores the thesis—good portfolios at a great price that died for lack of liquidity.

For the UBS ETNs, however, the bar for liquidity was set even higher, since primary users would demand liquidity above all else.

Moreover, the UBS suite faced another challenge, in that well-established, liquid ETFs and ETNs covering the one- and five-month exposures already existed. So their bet was that traders needed two-, three-, four- and six-month exposures in ETN form. In the end, that’s pretty fined-grained stuff.

The VIX product that remains on UBS’s roster, the Etracs Daily Long-Short VIX ETN (XVIX) provides a play on VIX contango in an off-the-shelf product. It goes long five-month and short one-month VIX futures.

I couldn’t help but notice that Jim Cramer commented on my colleague Olly Ludwig’s piece on these products, saying that VIX products are horrible investments.

My take is that VIX ETNS and ETFs aren’t really investments at all. They’re tactical tools for traders and speculators—professionals, in other words.

For these users, the UBS VIX ETNs never gained enough traction to become viable vehicles, so their demise is no great loss.

For the rest of us, the removal of this particular set of power tools from the selection universe isn’t a bad thing, either.

That’s because these products were ill-suited for retail investors even without the added risk and expense of poor liquidity.


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