Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Ummm… wow. In case you have not been following the saga of this VIX related product, it’s been an interesting few days. After yesterday’s plunge of nearly 30% (on a day VIX itself rose), the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) opened today down another 20% or so. This is a pretty shameful reflection on the ETF market in my view; and it’s not the first time we’ve seen such a dislocation in the ETF sphere the past 3-4 years.
The WSJ Marketbeat blog has a quick explanation
- The exchange-traded note, whose tongue-twister name is the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), has been trading at a premium ever since Credit Suisse stopped creating new units last month. Supply hasn’t been able to keep up with recent weeks’ demand for this product, which is normally used as a short-term hedge against stock-market declines or as a speculative bearish bet on stocks’ fall.
- But yesterday it plunged 29% for no reason that was immediately obvious during the regular session to the average investor. Traders who haven’t followed this story closely could be forgiven for expecting just about any leveraged VIX product to rise: Stocks were falling and traders’ demand for hedges was on the rise.
- Fast forward to around 7:30 p.m. last night, when Credit Suisse announced that it would reopen issuance of the product on a “limited” basis. The reopening is the event that this blog and others had predicted would trigger a plunge in the ETN’s value. The release included a warning that reopening could cause the premium in TVIX to evaporate, and that it would be tough to predict how the product will trade.
Also from IndexUniverse.com:
- TVIX’s assets had nearly quadrupled this year to almost $650 million in a pace so intense that Credit Suisse’s risk-control desk had to pull on the brakes and halt creations . Industry sources said it appeared the bank wasn’t fully comfortable with how quickly it was ramping up complex hedges. Since then, no new shares of the ETN have been issued, and TVIX has some $587.6 million in assets now.
- The halt had some immediate effects on competing strategies. Investors flocked to the double-exposure ProShares Ultra VIX Short-Term Futures ETF (UVXY) the very next day, and continued to pour assets into the fund in the weeks that followed. UVXY has, in fact, attracted $291 million in new assets since Feb. 22, a significant inflow considering the fund had under $30 million in assets as of Feb. 20.
- TVIX’s price began plunging yesterday morning, and ended the day almost a third lower at $10.20 a share. Still, that price was about 30 percent above its net asset value – a clear suggestion of how sought after the ETN remained after creations had been halted.
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
