ProShares was the first Exchange Traded Fund (ETF) provider for volatility based fund. The previous volatility entries from Barclays and VelocityShares were all Exchange Traded Notes (ETN). Click on the underlined ETF / ETN for discussions on how how these types of securities work. Proshares has done well, and currently is nearly tied with VelocityShares in terms of assets.
UVXY (2X long) and SVXY (inverse daily percentage long) track the same respective indexes as VelocityShares’ offerings: TVIX (2x long) and XIV (-1X short) . All these funds are large enough that their bid/ask spreads and liquidity characteristic are very good.
The salient differences are:
- UVXY and SVXY have options available
- Tax treatment: Because UVXY and SVXY explicitly hold VIX futures the IRS counts them as partnerships that need K-1 forms filed for taxable accounts at tax time. The VelocityShares ETN’s tax treatment is the same as regular stocks. On their website (point 1) ProShares elaborates:
Volatility, Commodity, Currency and Managed Futures ProShares will invest in a range of derivative instruments, including futures and forward contracts. In general, open futures positions will be marked to market, with their capital gains and losses reportable on a Schedule K-1 as other income (loss) from section 1256 contracts. These generally result in 60% long-term and 40% short-term gains/losses on the investor’s tax return. The reporting of gains and losses may vary depending on the specifics of a contract.
- Credit risk: Because ETF’s explicitly hold the underlying futures and swaps contracts that track the index their credit risk is lower than an ETN’s. With ETN’s you are essentially depending on a single company (e.g, Credit Suisse in this case) to honor their debts. All of the volatility ETN issuers are big banks with good credit ratings, so I think this risk is pretty small. See Credit Risk and ETNs for more information.
- TVIX has systemic tracking issues. Unlike UVXY which usually closely tracks its underlying index (^UVXY-IV on Yahoo Finance), TVIX often trades 1% to 2% higher than its intraday value (^TVIX-IV). Given the large swings in these securities this is not a huge issue, but it is a negative factor. For a while it was unclear whether Credit Suisse was going to maintain TVIX (e.g., with reverse splits to keep it trading above $1), but now it appears they are committed to the product.
- XIV would terminate with a -80% daily move. With PowerShare’s funds I can’t find any mention of termination criteria in the prospectus, except for the generic, “we can terminate whenever we want” clause. With a short daily percentage volatility fund it is not unreasonable to imagine an extreme event doubling volatility on the long side wiping out the short side. My assumption is that ProShares would terminate SVXY rather than allow its NAV to go negative.
For a complete list of available volatility ETFs and ETNs with links to associated indexes and information see Volatility Tickers.
- Is Shorting UVXY, TVIX, or VXX the Perfect Trade?
- How Does SVXY Work?
- How Does UVXY Work?
- UVXY Reverse Split Number 7—January 12, 2017
- Backtests for Popular Long & Short Volatility Exchange Traded Products
Friday, March 10th, 2017 | Vance Harwood