The contango fueled plunge in medium term volatility funds the last few months has been impressive. So impressive that it is likely to kill one of the remaining 20 volatility based ETPs, in the next few weeks.
Barclays’ VZZB is an “enhanced” ETN tied to S&P 500 VIX mid-term futures. Its enhancement is a leverage factor that at inception was 2X. VZZB is not a daily reset fund like VelocityShares’ XIV or ProShares’ UVXY. Instead it acts like an actual static 2x leveraged position where money was borrowed on its 8-July-11 inception to buy twice the number of VXZ shares that you could buy just with cash. The good news with this approach is that there is no path dependencies or compounding effects. The bad news is that the “participation rate”, or effective leverage changes over time and it usually isn’t in your favor.
For example on September 25th, after a brutal decline of 58% in the last 3 months Barclays’ VZZB web page showed its “participation”, its actual leverage at 3.5—more juice than even the UVXY/TVIX junkies get. This leverage will increase if VZZB moves lower, so at its 25-Sep-2012 close of 12.76 it would take less than an additional 7% downward move in VXZ to slam VZZB into its automatic termination value of $10.
This is what killed VZZB’s predecessor VZZ which terminated 1-July-11. Barclays was ready, and rolled out VZZB within a few days of VZZ’s demise, however this time I doubt VZZC (wild guess) will come into being—with just $1 million in assets after 1.5 years of existence, VZZB can safely be called a failed product. Barclays no-daily reset strategy for inverse (XXV, IVO, IVOP) and leveraged volatility funds (VZZ, VZZB) has some advantages, but the zombie XXV, and the termination deaths of IVO, VZZ, and likely VZZB have soured customers on this approach.
- ProShares SVXY 2:1 split planned for October 5th
- Other than VelocityShares’ 2011 splits of XIV and ZIV to reposition them as $10 to $20 ETNs, I believe this is the first split (not reverse split) of any volatility based ETP.
- The long awaited VXX 4:1 reverse split will occur October 5th
Wednesday, September 26th, 2012 | Vance Harwood