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ProShares To Reverse-Split VIX ETF UVXY

Olivier Ludwig


ProShares, the fund company known for its large family of inverse and leveraged ETFs, set a 1-for-6 reverse split on its now-super-popular VIX-related ETF “UVXY” to ensure that bid/ask spreads on the security don’t grow too large as a percentage of its declining share price.

The fund, the double-long ProShares Ultra VIX Short-Term Futures ETF (NYSEArca:UVXY - News), has been in the news since last week, when its popularity began soaring in the wake of Credit Suisse’s decision to halt creations of the VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca:TVIX - News)—an exchange-traded note that delivers similar exposure to the VIX volatility curve as UVXY.

The decision to do a reverse split on UVXY isn’t related to the explosion of interest in the ETF, but is a function of the downward pressure on VIX futures over the past several months. UVXY was worth more than $34 a share when it came to market in October of last year, and it’s now trading at $5.60, according to Google Finance. It has lost more than half its value since the beginning of the year.

Even though UVXY often trades with a bid/ask spread of just 1 cent, that penny becomes a more conspicuous trading cost the cheaper the ETF becomes. The 1-for-6 reverse split, effective March 8 for shareholders of record as of the close on March 7, will pump up the share price about six times and cut the number of outstanding shares by about the same amount.

At today’s price, UVXY, now the only double-long exchange-traded product that’s taking in new money, would be worth more than $33 a share on a post-split basis.

UVXY’s Exploding Popularity

By the looks of it, UVXY continues to be the beneficiary of halted TVIX creations last Wednesday, and in a big way.

It has traded more than 6 million shares today, according to data posted on Yahoo Finance, and that comes on the heels of two sessions when trading volume exceeded 5 million shares, according to data compiled by IndexUniverse.

UVXY’s assets under management have exploded upward since Credit Suisse’s decision . The Swiss bank said it made the move because TVIX had exceeded its “internal limits”—what appears to be a fancy way of saying that the ETN’s assets were growing so rapidly that the bank’s risk-control desk might be having difficulty ramping up complex hedges just as quickly.

There’s little doubt that interest in CBOE’s Volatility Futures—the so-called fear index—has taken off this year. At the time of TVIX’s halted creations, UVXY had about $26 million in assets, about four times the amount as of the end of last year.



Fast-forward just two sessions, and the ETF grew to a nearly $69 million fund—a figure that includes $43.5 million in creations last Friday alone, according to data compiled by IndexUniverse. That said, it’s important to remember that VIX assets aren’t sticky in the way that assets are in a broad-based ETF like say, the Vanguard S'P 500 ETF (NYSEArca:VOO - News).

But with the short-term VIX contract trading at about $18, there’s a growing sense in financial markets that the relatively low VIX price is out of step with real risks that remain in the macroeconomy—from another setback in the eurozone’s management of its sovereign debt crisis, to a breakout of hostilities between U.S. and Iranian forces in the Persian Gulf.

Putting that $18 VIX price in perspective, the fear gauge was near $50 last summer at the time that Standard ' Poor’s downgraded U.S. sovereign debt and was near $80 when the stock market collapsed in September 2008.

The basic point is that plenty of investors and traders reckon the VIX might shoot higher before long, which explains why people are piling into UVXY, particularly since TVIX is not taking in any new money.

Fractional Shares

Regarding UVXY’s reverse share split, for shareholders who hold quantities of shares that aren’t an exact multiple of the reverse split ratio, the reverse split will result in the creation of a fractional share.

Any fractional shares will be redeemed for cash and sent to shareholders’ brokers of record, ProShares said in a press release.

These sorts of redemptions can cause shareholders to realize gains or losses, which could be taxable events in nonretirement accounts.


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