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Popular Volatility ETFs Expiring: What You Need to Know

Neena Mishra
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The most popular exchange traded product to bet on volatility—iPath S&P 500 VIX Short-Term Futures ETN (VXX)--is expiring tomorrow. Launched in 2009, VXX currently has about $489 million under management and is one of the most actively traded products in the stock market.

The VIX--popularly known as the “fear index” --and the S&P 500 index are generally negatively correlated and the VIX often surges when stocks plunge. As the VIX itself is un-investable, traders use VIX futures contracts to bet on volatility.

(VIX & Volatility ETFs--What You Need to Know)

VXX soared in the fourth quarter of 2018 as stocks plunged. While volatility has come down significantly this year, the product is still up about 31% over the past year. However, since its inception, VXX is down more than 99%, highlighting that these products are suitable only for short-term trading.

VIX ETFs and ETNs are based on the futures curve that usually suffers from contango i.e. later dated contracts are more expensive than near dated contracts. Since these products have to buy the next month contracts that are more expensive than current ones, the roll-over eats into their returns.

In fact, the product’s prospectus states: “If you hold your ETNs as a long-term investment, it is likely that you will lose all or a substantial portion of your investment.”

VIX linked products were in focus in February last year when they were blamed for exacerbating the market sell-off. A couple of inverse volatility products were shuttered by their sponsors. Another sponsor, ProShares reduced the target exposure on its inverse volatility product—the Proshares Short VIX Short-Term Futures ETF (SVXY)—to one-half the inverse (-0.5x) of the moves in the VIX from inverse (-1x).

(Volatility ETF Crash--Important Takeaways)

Another volatility ETN--the iPath S&P500 VIX Mid-Term Futures ETNs (VXZ) is also expiring tomorrow. Both VXX and VXZ are structured as exchange traded notes (ETNs). Unlike ETFs, ETNs do not actually hold any securities. Instead, the issuing bank promises to pay to investors the amount reflected by the index’s performance (minus fees).

Furthermore, because ETNs are debt securities, they have a maturity date when the note’s principal is paid out to investors.  Some ETNs can also be called in by their issuer before the maturity date.

ETFs Vs. ETNs: What Investors Need to Know

Investors who hold VXX or VXZ will receive cash for the product’s closing value today. Barclays has also launched new ETNs to replace the expiring ones. So, investors have the option of swapping into these new products—the iPath Series B S&P 500 VIX Short-Term Futures ETNs (VXXB) and the iPath Series B S&P 500 VIX Mid-Term Futures ETNs (VXZB). 

To learn more, please see this press release from the sponsor.

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