Two new exchange traded funds tracking option implied volatility on the S&P 500 have begun trading on the Bats Exchange, aiming to get a step closer to achieving the holy grail of an investible version of the CBOE’s VIX volatility index.
REX Shares, headed by Greg King – former head of Barclays’ iPath exchange traded note platform and co-founder of VelocityShares – launched its VolMAXX products on May 3. VMAX offers long exposure to the VIX index and stands to benefit from spikes in volatility, while VMIN provides inverse exposure, enabling investors to benefit from any dampening of volatility.
Since the launch of iPath’s S&P500 VIX Short-Term Futures Exchange Traded Note (VXX) in 2009, which kick-started the listed volatility tracker market, attempts to improve correlation to the VIX index have proved elusive. AccuShares struggled to gain traction with spot-tracking VIX ETF Up and Down shares that launched a year ago as investors were left baffled by a complex monthly payout and reset structure.
The latest addition to the listed volatility market aims takes advantage of new weekly expirations for VIX futures that were launched by the CBOE in July 2015.
REX Shares notes that the beta of VIX futures typically increases as contracts move closer to maturity. The new funds maintain a weighted average time to expiry of less than 30 days, which means that the products should more closely track daily VIX spot moves.
“We believe VMAX and VMIN are exactly what sophisticated investors have been asking for: exchange-traded funds that get closer to spot VIX,” said Greg King, founder and CEO of REX Shares. “Thanks to recent innovations at the CBOE Futures Exchange, we are able to deliver these products to market.”
Existing exchange traded VIX products typically track an index of VIX futures strategies rather than the VIX itself. VXX reflects daily rolling of a long position from first to second month VIX futures. That means spot moves are dampened in the fund’s performance.
During the equity rout of August 20–24 2015, for example, VIX spot more than doubled from 19 to over 40, while VXX delivered only a moderate increase from 17.6 to 24.4.
Liquidity concern
The issue with weekly VIX futures, however, is that low liquidity could prove to be a stumbling block for AUM growth in the new ETFs. Open interest in standard front-month expiries currently exceeds 150,000 contracts while the four weekly instruments have combined open interest of just 670 contracts, according to CFE data.
The firm is hoping that interest in the fund will help to boost weekly futures liquidity, mirroring the impact that VXX had in driving activity in standard VIX futures. As an actively managed product, however, VolMAXX can limit its exposure to contracts in accordance with liquidity constraints.
The latest fund holding data show VMAX held just 30 front-week futures with 25% of assets in ProShares’ VIX Short Term Futures ETF (VXY) and a corresponding short on VelocityShares’ Inverse VIX ETN (XIV). VMIN was short 32 VIX-weekly contracts, with 25% of assets invested in ProShares’ Short VIX ETF (SVXY) and a similar short position on VXX.
The latest structure does not directly address the value decay associated with a VIX futures curve locked in near-constant contango, with longer-dated futures typically trading at a premium to front-month contracts in recent years. That causes significant value destruction over time as investors systematically roll out of cheaper contracts and into more expensive ones.
VXX, for example, has shed around 99.8% of its value since launch in 2009 and is 30% down year-to-date.
Second generation products that aimed to address the value decay by rolling further down the curve or incorporating short positions to lock-in the short-volatility, have also struggled to perform as they typically fail to deliver any surge in value alongside VIX spikes.
Assets under management across all VIX-related exchange-traded products stands at US$5.3bn, according to research from Barclays, with total vega notional of US$246m. VXX remains the largest, with AUM of US$1.5bn, followed by ProShares’ leveraged fund, UVXY, and VelocityShares’ inverse VIX note, XIV. Both have garnered over US$900m in assets.
Early indications suggest that investors have started to warm to the latest addition with around 160,000 shares traded across the two VolMAXX products since launch Thomson Reuters’ data show. It is still a long way off VXX, however, which traded over 300m shares over the same period.
* Updates paragraphs 10 and 11 with new fund holding information.
