The Securities and Exchange Commission is said to be in the early stages of investigating the VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX), the result of the exchange-traded note’s price deviating sharply in recent weeks from its underlying net asset value (NAV), according to a report published in the Wall Street Journal that cited people familiar with the SEC.
The latest piece of the tale—and quite possibly the reason the SEC became interested—came last Thursday, when TVIX lost almost a third of its value. The odd part of that sharp decline was that it came before an official announcement from the ETN’s issuer, Credit Suisse, that would explain the drop.
For the record, an official at the SEC told IndexUniverse today that the commission had no comment on the existence of an inquiry into TVIX. Whatever the SEC decides, it’s clear that TVIX’s travails are a sign that some exchange-traded products aren’t appropriate for the typical investor. IndexUniverse Director of Research Dave Nadig weighed in today in a blog, arguing for greater disclosure on complex securities.
In any case, late last Thursday evening—after TVIX lost about 30 percent and closed at $10.20 a share—the Switzerland-based bank said it was partially resuming creations of TVIX shares after it had halted creations several weeks earlier. We wrote about the strange timing of last week’s move in a piece titled “Did The TVIX News Leak?” On Friday, March 23, TVIX tumbled another 30 percent.
Those two sharp moves effectively erased the premium to NAV that TVIX had been trading at since Credit Suisse halted creations on Feb. 22.
The bank said at the time of the halt in creations that assets in the ETN had been growing so rapidly that they had busted through “internal limits.” We understood that to be code for: “This ETN is growing too fast for us to effectively hedge our risks as issuer.”
So the ETN’s price quickly moved to a premium to its NAV, and the day before Credit Suisse started creating new TVIX shares again, yhat premium was at about 90 percent.
Again, that premium came crashing down when Credit Suisse resumed creations.
The whole saga is plainly visible in the chart below and should drive home the point that whatever the SEC uncovers in its inquiry, the vast majority of investors—“qualified” or not—probably should keep away from securities like these with a 100-foot pole.
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