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iPath Sets VXX 1-For-4 Reverse Split

Olly Ludwig

iPath, the exchange-traded note provider backed by Barclays Plc, set a 1-for-4 reverse split on its popular iPath S'P 500 VIX Short-Term Futures ETN (VXX) to pump up the share price of the security, which has lost three-quarters of its value this year alone.

The reverse split will be effective on Friday, October 5, to shareholders of record Oct. 4, the company said in a press release. Barclays said under terms of the notes it has the right to set a reverse split once VXX’s closing indicative value falls below $25. The security’s closing indicative value ended trade on Friday, Sept. 21 at $8.71 a share.

VXX, which is down almost 84 percent over the past year, has lost its value due in part to declining volatility, and also because the VIX futures curve is in contango—a condition characterized by rising prices across the contract months. That means maintaining exposure involves paying more for a new contract than the expiring contract is worth, which eats into returns significantly over time.

The VIX volatility index is now just below 14, compared with a long-term average of 20. Also, for comparative context, it was up near 50 in the summer of 2011 as legislators in Washington, D.C. fought over raising the debt ceiling, and it was up around 80 when financial markets collapsed in September 2008.

VXX, despite its sharp losses that have earned it the distinction of being the single-worst-performing exchange-traded product year-to-date, remains the most popular VIX-related security on the exchange-traded product market. It had assets of $1.71 billion as of Sept. 20, according to data compiled by IndexUniverse. The security is meant to be portfolio insurance, as its value spikes when equity markets tumble.

The reverse split will cut the number of outstanding VXX shares by a factor of four, which in turn will push the share price up four times. At Friday’s price, that would mean VXX would be worth $34.84 a share after the split.

Investors who hold a number of ETNs that is not divisible by four will receive one reverse-split-adjusted ETN for every four ETNs held on the record date and a cash payment for any odd number of ETNs remaining, the company said.

The cash amount due on any partials will be determined on Oct. 12, 2012, based on the closing indicative value of the reverse-split-adjusted ETNs on that date, and will be paid by Barclays Bank Plc on Oct. 17.

The reverse split applies to VXX shares listed on both the New York Stock Exchange and on the Toronto Stock Exchange.


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