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Volatility Spike Enhances Allure of These ETNs


One of the glaring items from Monday’s market meltdown was that the VIX, often referred as the “Fear Index” closed above 20 for the first time this year.

Actually, the VIX closed at 21.44, its first close above 21 since December 2012. A sharp increase in volatility is often viewed as a negative by many investors, but for Connecticut-based VelocityShares, issuer of a suite of volatility exchange traded notes, soaring volatility is not such a bad thing.

Traders have been pouring into the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) , noted VelocityShares Chief Investment Officer Nick Cherney in an interview with ETF Trends. Monday’s volatility surge prompted traders to increase their bets against XIV, which itself is a bet against volatility. [Inverse VIX ETNs Hit New Highs]

By the time the closing bell sounded Monday, turnover in XIV was nearly five times the daily average. In dollar terms, XIV traded about 3.5 times its trailing 90-day average, according to VelocityShares.

“When volume spikes, we see the most interest in XIV,” said Cherney. “We saw a 60% increase in shares outstanding in XIV in January.”

XIV, which more than doubled in 2012 and again in 2013 as volatility slid, is a play on VIX futures that are at the front end of the futures curve, meaning the ETN is more prone to be whipsawed as volatility increases, notes Cherney.  XIV is also currently in backwardation, the scenario where as expiration date nears, futures contracts rise to higher prices than where they resided when expiration was further out.

The VelocityShares Daily Inverse VIX Medium Term ETN (ZIV) , which saw volume of nearly quadruple the daily average on Monday, is in contango, according to Cherney. ZIV tracks futures which are further out the curve, and are currently in contango (meaning the longer dated contracts are above the near date contracts)

Cherney describes ZIV as XIV’s “slower, tamer brother” while noting interest in ZIV has increased as well with shares outstanding in that ETN jumping 17% last month. While not on par with XIV, ZIV was no slouch in 2012 and 2013 returning almost 91% and nearly 63%, respectively. [VIX ETNs Rally as Market Stumbles]

Traders looking to participate in further VIX upside from a bullish point of view can opt for the $174.6 million VelocityShares Daily 2x VIX Short Term ETN (TVIX) . TVIX surged almost 14% on nearly five times its average volume for the trailing three months. TVIX is up nearly 39% since the start of 2014.

VelocityShares Daily Inverse VIX Short-Term ETN