Barclays’ XXV —the first ETN with nowhere to go?

Wednesday, May 14th, 2014 | Vance Harwood
 

Update.  Barclays’  responded to the problems noted below with their IVOP ETN.  It has now has a similar situation that XXV has—near its max price and very low leverage.    See this post for more information.

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Originally Posted December 11, 2011

Question: What would the value of Barclays’ inverse volatility XXV ETN be if Barclays’ volatility VXX ETN goes to zero?

Answer $40 / share

As this Volatility Futures and Options post makes clear, Barclay’s XXV doesn’t have much of a future.  Currently at $33,  it can’t go higher than $40,  a 21% increase from where it is now—regardless of how low VXX goes.   After a 50% rise in its first 3 months of existence, this little nova of a fund is doomed to spending the rest of its life in lethargy.

To me XIV, VelocityShares Daily Inverse VIX Short-Term ETN, which tracks the inverse daily returns of VXX, looks like a much better solution if you want to profit from VXX’s contango driven path towards zero.

The graph below shows how XXV has run its course, and how XIV is giving superior performance.

XXV vs XIV, click to enlarge

 



XXV: Dancing the contango—without getting mugged

Sunday, August 17th, 2014 | Vance Harwood
 

Update

I do not recommend XXV.  At its current price of around $30/share  it does not deliver the sort of performance you would expect an inverse volatility security to deliver.   This security can go no higher than $40 per share and can only get there slowly.  See this post for more information.   If you want to be short volatility use XIV or SVXY.

Original Post

The inverse volatility ETN XXV has gained over 50% in the 70 trading days since Barclays introduced it.   However, far from lighting up the investment community the interest in XXV  has been moderate, with an average daily volume in October of 231 thousand compared to 31 million for VXX—its inverse.

If you’ve been paying attention, you know that VXX ( which not surprisingly has lost over 50% in the same period) suffers from two major maladies:

  1. The VIX index, on which the VXX is based (via volatility futures) tends to drop towards the 10 to 15 range when the market is going sideways or up.  There is no prospect for sustained, long term growth.
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  2. The VXX ETN must continually update its portfolio to include more longer dated futures and fewer short term futures.    Longer dated volatility futures are almost always more expensive than short term, so the VXX operators are continually buying dear and selling cheap.   In commodities markets this higher price structure for longer dated contracts is called contango

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With two strikes against VXX, why aren’t people buying XXV, or just shorting VXX?

If these two ETNs were people, VXX might be a depressed alcoholic artist that has occasional bouts of brilliance,  whereas XXV might be an overperforming sales person that normally blows through sales quotas, but occasionally disappears for a couple of weeks and then calls asking you to post bail.

If you want to invest in XXV you should have a pre-disappearance sell strategy.  XXV already has a doomsday $10 “termination event” stop loss built into it, but with XXV currently above 30 a loss limited to 66% or more is not comforting.

A trailing stop strategy is attractive, with perhaps a 2% trigger, but a key requirement for a stop loss order to work well is an orderly market when things are dropping.   If the XXV price gaps down in bad times then a trailing stop order would not offer the protection it implies—potentially filling at a much lower price than 2% off its high.

Evaluating XXV’s behavior during the May 7th Flash Crash would be a great test—except XXV didn’t start trading until July 19th.

Not easily deterred, I synthesized an approximate XXV chart for all of 2010 using VXX intra-day high data.   I used the intra-day highs, because that would map to the intra-day lows in XXV that would potentially trigger a stop loss order.  I didn’t try to include the impact of XXV’s .89% yearly fee in my calculations.

Comparing the chart of the actual XXV values (purple) against my synthesized chart (green) suggests this approach is valid.

The May Flash Crash and subsequent market correction would have dropped XXV to around 15, but would not have tirggered the $10 doomsday stop loss.    The market uncertainty preceding the Flash Crash would have tripped a XXV position’s 2% trailing stop around April 27th, and the rising $VIX would have kept a prudent investor out of XXV until well after the volatility fireworks died down.   In summary, a trailing stop type approach looks like good way to protect an investment in XXV.

This same analysis should apply for just being short VXX, however my broker rarely has VXX available to short, and with an IRA account you can’t sell equities short, so XXV is the best option for me.



XXV behavior—it’s a pretty good VXX short

Sunday, November 24th, 2013 | Vance Harwood
 

Update: I do not believe XXV is a good way to short VXX, or volatility in general.  It has very little upside remaining (maximum value will be $40/share),  see this post for more details.

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With the recent action in the VIX and VXX I thought it would be good time to go back and check the performance of Barclays’ new ETN product XXV to see how it is performing.

 

 

 

XVV — VXX short or percentage move, click to enlarge

 

Clearly XXV is intended to perform like a short of VXX.  With a little imagination you can foresee that on-going charges will prevent a perfect match, but after nearly two months my hypothetical true short of VXX vs XXV is tracking  with only about a 1% lag—impressive.

With VXX fighting a big contango headwind XXV is looking like a pretty attractive investment.



XXV Prospectus

Monday, January 10th, 2011 | Vance Harwood
 

Update: I do not believe XXV is a good way to short VXX, or volatility in general.  It has very little upside remaining (maximum value will be $40/share),  see this post for more details.

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XXV Prospectus:   XXV:  Barclays Inverse VolatilityETNs

Usually getting the prospectus for a new ETF or ETN takes a Google search and a couple minutes of browsing.  The prospectus for Barclays’ new XXV inverse volatility ETN proved to be a much more elusive search—it didn’t show up in the top 20 hits.   Reading through the fine print of the XXV Fact Sheet provided this pointer for web access:

Before you invest, you should read the prospectus, prospectus supplement, pricing supplement and other documents Barclays Bank PLC has filed with the SEC for more complete information about Barclays Bank PLC and this offering. You may get these documents for free by visiting EDGAR on the SEC website at www.sec.gov.

Even finding the prospectus on EDGAR proved to be frustrating.  My search in Edgar’s company search for  “Barclays Bank PLC”  resulted in a  lot of hits, but 20 minutes of clicking did not yield anything XXV related.    I finally did an  EDGAR text advanced search with XXV as the text and Barclays Bank PLC as the company to find the XXV prospectus and a few other related documents.

I have only started to dig through this 66 page document, but so far the most interesting aspect of XXV is its “Automatic Termination Event”—which liquidates your position if the intraday indicative note drops to $10 or less.   I don’t know of any other ETN or ETF that includes a built in stop loss order like this.   XXV is effectively a short of VXX, and as investment writers are fond of reminding us, a short position can theoretically result in “infinite” losses.  The people at Barclays have decided to block the infinite losses scenario  by limiting an investor’s potential maximum loss to be whatever they invested minus around $10 per share.

Somewhat sobering, the prospectus finishes the section on Automatic Termination Event with:  “If the historical frequency of precipitous increases in market volatility persists, it is highly likely that an automatic termination event will occur”.

This is probably not an investment that you want to buy and hold…

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Prospectuses for a couple of other volatility based products:

CVOL’s pricing supplement / prospectus

XVIX E-Tracks Long-Short  prospectus



Betting that fear will fade

Tuesday, January 29th, 2013 | Vance Harwood
 

Made my first trade in XXV yesterday, buying at 23.07.    During corrections, like the one we are in right now, the VIX index tends to spike up pretty early, a day or two in.   Later, even when the market drops are larger, the VIX does not seem to match the earlier highs–unless of course the market moves into a more panicky phase.