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ETF Spotlight: Barclays S&P 500 Dynamic VEQTOR ETN (VQT)

tlydon@globaltrend.com (Tom Lydon)

ETF Spotlight on the Barclays S&P 500 Dynamic VEQTOR ETN (VQT - News) , 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.