After the February market plunge that sent volatility spiking and precipitated the early demise of the VelocityShares Daily Inverse VIX Short Term ETN (XIV), a few issuers have tinkered with their own VIX-based products.
ProShares has already changed the degree of leverage on two of its VIX-based products. The ProShares Ultra VIX Short-Term Futures ETF (UVXY), which previously sought to provide twice the performance of the S&P 500 VIX Short Term Futures Index, now offers just 1.5x leverage.
Similarly, the ProShares Short VIX Short-Term Futures ETF (SVXY), which previously offered simple inverse (-1x) exposure to the same index, has halved that. SVXY now provides -0.5x exposure to its underlying index.
The prospectus for the funds notes that margin requirements could affect the products’ ability to track their underlying index, and points out that, due to the recent volatility, futures commissions merchants (FCMs) have increased their margin requirements on VIX contracts, which makes it more difficult to achieve the funds’ goals. The changes are meant to reduce the likelihood of this outcome.
Further, according to the prospectus, the FCMs have imposed their own position limits on the funds, which limit the exposure the fund can access through a single FCM. This means ProShares must engage in transactions with a number of FCMs, and it could be difficult to find enough willing to do so, which adds to the risk the fund will not achieve its objective.
Meanwhile, REX recently announced its actively managed REX VolMAXX Long VIX Weekly Futures Strategy ETF (VMAX) and its REX VolMAXX Short VIX Weekly Futures Strategy ETF (VMIN) will shift their focus to VIX futures with two to six months to expiration. Until this announcement, the funds have focused on contracts with 30 days or less to expiration.
The move should serve to dampen the funds’ own volatility. The press release from REX noted the beta of VIX futures relative to the VIX tends to increase the closer the contracts are to expiration. It also says the funds’ shift in focus would begin on March 7.
Contact Heather Bell at [email protected]