Barclays’ IVO bites the dust

Updated: Sep 25th, 2011 | Vance Harwood

IVO,  one of Barlays’ inverse volatility ETNs terminated today when it briefly dipped below its $10 termination value.  The automatic redemption value will be $11.8024 next Monday, the 19th.   IVO was designed to behave as a true short of the short term volatility index SPXVSP ( fundamentally the same index that VXX tracks).  This approach avoids the potential path dependency / compounding errors of percentage tracking, daily rebalancing inverse funds like VelocityShares’ XIV or UBS’   AAVX,  but at the cost of having variable leverage.   As you can see below, IVO’s leverage was around 3X when it terminated.

Inverse Volatility daily leverage vs VXX price, click to enlarge

IVO’s leverage dropped below 1X when volatility is low—which in my opinion delivers the worst of both worlds:  high leverage when volatility is high and low leverage when volatility is low and contango is punishing those long short term volatility.

Barclays other inverse volatility ETN, XXV only has a leverage factor of 0.3 currently so I predict they will move quickly to replace IVO.   They had VZZB available to replace VZZ almost immediately after its termination.   Possible tickers would be XXVA or IVOA—IVOB appears to be taken.  (update:  IVOP  is the symbol for the IVO replacement).

For more on volatility ETN termination events see this post.

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Sunday, September 25th, 2011 | Vance Harwood
  • Lok

    Hi Vance,
    How to determine that the redemption value is 11.82? While the termination value is 10?
    There’s a 1.82 difference between those values

    – Lok –

  • Andrew

    Looks like last IVO trade after hours was 11.78 according to Yahoo!, so pretty close to 11.82. So what are the termination conditions on XIV again? 80% loss in one day, right? But what if it starts trading for under a buck… they probably have discretionary ability to close it down for any reason…

  • Hi Lok,
    The 11.82 value came from the press release that I linked to in the post. The prospectus says that the automatic termination value will equal the closing value of the index at the end of the day when the ETN is terminated. That makes sense since the market rallied at the end of the day.

    — Vance

  • Hi Andrew, Yes, 80% is the termination value. The prospectus guarantees that the fund won’t go negative, but I don’t think it specifies an absolute value anywhere. As you say there is probably fine print that allows them to shut things down if they feel like it. Since percentage moves on a smaller number give less absolute movement I think XIV below $1 is very unlikely.

    — Vance