TVIX – Not Your Daddy’s Blue Chip

Our parents or grandparents, who used to own shares of American Telephone and Telegraph (that’s AT&T, or just $T for the youg’uns),  US Steel, and Phillip Morris – eagerly collecting their quarterly dividend payments while counting on slow and steady capital appreciation – would surely not understand today’s stock market cocaine: leveraged exchange traded products based themselves on futures on volatility indices. (asphinctersayswhat?)

Does anyone remember the 2006 movie, Crank, starring Jason Statham?

The plot, boiled down, is that Statham’s character has been injected with a drug -“A Chinese synthetic” (!!!) – and if his heartrate drops, he’ll die.   It’s kinda like Keanu Reeve’s Speed, except that instead of a bus that must be kept at 50mph,  it’s Statham’s heart.  Well $TVIX is the crank of today’s stock market – an adrenaline rush of a product that daytraders latched onto and turned into a beast with nearly $700 MM in assets.


Who needs drugs when you've got TVIX?


TVIX is an exchange traded note issued by Credit Suisse whose return is linked to 2 times that of the underlying index: the S&P 500 VIX Short Term Futures index.  Things have changed quite a bit from the not-so-distant day and age where I was an expert in ETFs.   First of all, TVIX isn’t an ETF – it’s an ETN (exchange traded note, vs exchange traded fund).   That means that it’s a debt obligation of Credit Suisse – the issuer.   Credit Suisse pays the “return” on the product (as detailed in the prospectus), and hedges it on their own.   Compare and contrast this to an ETF like the SPY:  the $SPY is a Trust that owns a basket of stocks.  When there is a change in the index, the Trust must execute the trades itself and bears the price slippage/benefit related to any such trading.

When you own SPY, you own a share in a Trust that holds a basket of stocks in order to gain the desired exposure.   When you own TVIX, you own an IOU from Credit Suisse where CS pays you the promised return and takes care of their own exposure, incurring the cost (or gaining the benefit) from maintaining the hedge.   Once we understand this, we can understand potential reasons why Credit Suisse may have halted creations of new TVIX shares for the time being.   With a leveraged product like TVIX, which provides double the return of its underlying index, there is a “gamma” effect to the hedging:  on days where the underlying index rises, CS must “buy” even more exposure to the underlying index.   Similarly, on days when the index falls, CS must “sell” even more exposure in the underlying index.   Either way, the effect is to magnify the moves.  (see Dave Nadig’s piece on leveraged ETFs for more)

Now, this is not unique to the TVIX, of course – and some market commentators have blamed leveraged ETFs for exacerbating the volatility in the stock market in recent years.   Dave Nadig at IndexUniverse wrote a pretty thorough piece which provides evidence that this “tail wagging the dog” effect is not going on in stocks, but with VIX futures, the case may be different.  I am guessing that CS is running into the point where the execution of their hedges is either costing them money or having too much impact on the underlying index itself.

Let me be clear:  I am not The Axe on VIX futures and the VIX exchange traded products.  Fortunately for all of us, “There’s an App for that.”  If you’re interested in trading the VIX ETPs, or just curious about them in general, there is one blog which you absolutely MUST be reading:  Bill Luby’s VixAndMore.   Bill has forgotten more about the VIX than I have ever known, and his blog focuses on the nuances of the different products and the pitfalls traders should be aware of.  Of course, he was the first one to write a detailed and thorough description of what’s happening with TVIX’s creation halt.

I wrote yesterday about the curious case of GAZ, another product whose creations have been halted.  GAZ is a micro cap ETN, however, while TVIX is a solid-sized $700 MM.    I wouldn’t expect TVIX to trade up to a huge premium to NAV because it’s a much bigger fund requiring many more “fools” to pay a premium to NAV.  As I noted that investors have $UNG as an alternative to $GAZ,  Bill Luby points out that there are alternatives to TVIX:

” Given that supply is constrained and demand is not, the most likely scenario is that TVIX will trade at least as high as net asset value or possibly at a premium. Valuation will be highly dependent upon arbitrage opportunities and there are quite a few arbitrage opportunities should TVIX begin to separate from its NAV. VIX futures provide an attractive source of arbitrage firepower, as does the very similar 2x VIX futures ETF, UVXY, formally known as the ProShares Ultra VIX Short-Term Futures ETF. Arbitrage opportunities are also available via VXX, VIX options as well as options on SPX/SPY, etc.”

So it seems that there are a number of good reasons why TVIX shouldn’t trade at a huge premium to NAV.   However, when the inmates are running the asylum, anything can happen.  After all, I spend much of last year writing about a sizable fund that had no creation feature, had a perfectly good alternative product that did almost exactly the same thing, and yet still traded at a very large premium to its Net Asset Value.  Anyone remember that?

As I write this, $VXX is down about 1/2 %, $TVIX is up about 3.5%, and $UVXY is down about 3/4%.   So you can see that a small premium to NAV is already creeping into TVIX.  I should also take a moment to mention that TVIX’s prospectus has one of the best warnings you’ll ever see in it, as Bill noted earlier in the week (emphasis NOT mine – it’s in the prospectus like this):

The long term expected value of your ETNs is zero. If you hold your ETNs as a long term investment, it is likely that you will lose all or a substantial portion of your investment.

They even BOLD it and underline it for you in the prospectus.  Good stuff.



VIXandMore: CS Suspends Creations in TVIX – What it Means

KD: GAZ: The Ultimate Greater Fool Trade

IndexUniverse: Leveraged ETFs: Not Wagging The Dog


disclosure: no positions in $GAZ, $VXX, $TVIX, $UVXY


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