Barclays’ inverse volatility ETN: IVOP


Updated: Dec 1st, 2012 | Vance Harwood | @6_Figure_Invest

The termination of IVO left a hole in Barclays’ inverse volatility ETN lineup.   It still has XXV, but its leverage is only around 0.25 right now, so they needed a higher leverage solution that can compete with the likes of UBS’ AAVX, or VelocityShares‘ XIV—which always give 1X daily leverage.

IVOP had an inception date of September 16th, 2011 with an initial value of $20.   Barclays’ inverse volatility funds are essentially short positions on the same index that VXX tracks.  The short position is effectively created on the inception date, and it is not adjusted after that.   This approach differs considerably from their competitors’ offerings which deliver daily percentage moves matching  the inverse of the  index.

IVOP will not suffer from the compounding / path dependency problems of the competitors, but at the cost of exhibiting variable leverage—high leverage in volatile times, and low leverage in the quiet times when inverse volatility performs the best.   High leverage proved to be the undoing of IVO, the predecessor of IVOP.  Its leverage was approaching 3X, when it hit its $10 termination value.   IVOP’s leverage will be near 1X when VXX is around $41 and will terminate if VXX climbs above approximately 62.3.   The chart below shows projected leverage values v.s. VXX values.  The black vertical line shows VXX’s 19-September close.

XXV, IVOP, XIV leverage vs VXX, click to enlarge

For IVOP’s prospectus look for IVOP in Volatility Tickers

 

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Saturday, December 1st, 2012 | Vance Harwood