Barclays’ IVO bites the dust


Updated: Sep 25th, 2011 | Vance Harwood | @6_Figure_Invest

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