RIP: XIV. Credit Suisse declares 'acceleration event'. Will close ETN

Sean Reid
February 9, 2018

Two investment vehicles tied to U.S. share market volatility collapsed after the S&P500 closed earlier this morning, and it could have significant implications when markets reopen later tonight. As volatility-related products scrambled to buy VIX futures in order to rebalance ahead of their 4.15 p.m. daily deadline to calculate the value of their underlying assets - they effectively pushed up the price of the contracts and eventually the index. What does this all mean and why should you avoid these ETFs? More than a dozen of volatility-pegged products were halted on Tuesday as the Cboe Volatility Index gyrated wildly.

"If the S&P 500 can't find a bottom tonight, these ETPs will liquidate overnight".

"Many view the [recent] downturn as a necessity to the runaway equity markets and see it as an opportunity for investors to reinvest at more manageable levels", CMC Markets analyst Oriano Lizza said. Credit Suisse AG - VelocityShares Daily Inverse VIX Short Term ETN has a twelve month low of $5.50 and a twelve month high of $146.44. During 2008, when it looked like financial markets would collapse, the VVIX index, which measures the volatility of the volatility index, peaked at 135. It is just an assumption based on option premiums - the price to buy or sell the right to buy or sell a stock.


Once the investor has calculated risk and decided on a suitable time horizon, they may be wondering how to best start doing research on particular stocks and the market in general. Products that are directly linked to the VIX may manage as much as $US8 billion, according to Societe Generale estimates. If even one person knows about the next big stock, chances are many other people already do as well. Forward Management LLC now owns 2,851 shares of the company's stock valued at $278,000 after acquiring an additional 1,806 shares in the last quarter. But these bets aren't straightforward to make. Because the VIX and its ETF derivatives are not investments! Despite the name, CCI can be used on other investment tools such as stocks.

"The long term expected value of your ETNs is zero", the prospectus says. Stock prices follow earnings growth, and thus the stock market rises over time. Even one of the inventors of the VIX, Devesh Shah, is perplexed why these products exist in the first place. It is literally gambling. Think of it as built-in depreciation.

You are not only gambling, then, if you hold this security, you are literally just handing all your money to the casino. So when volatility spiked by a record 116% on Monday, the funds plummeted.


In a separate interview with Quartz, Golden sounded slightly apprehensive about continuing to trade volatility the same way. It was so bad that after-hours on Monday, the XIV fell 90%. Thus, trading is frozen, and whatever value your share is at that time is what you receive. In other words, the ratio provides insight into the profitability of a firm's assets.

Adding to the angst is the sobering fact that neither market strategists nor money managers nor bankers who've structured these products are quite sure just how big and pervasive the market is. They have no place in your portfolio.


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