Popular Volatility ETN Expiring: Now What?

December 21, 2018

One of the most popular exchange-traded products on the market is set to mature at the end of January, and anyone trading this ETP should know what to expect. The product is the $688 million iPath S&P 500 VIX Short-Term Futures ETN (VXX), an exchange-traded note that tracks Cboe Volatility Index (VIX) futures.

On Jan. 30, 2019, VXX—which consistently ranks as one of the most actively traded ETPs in the U.S.—will cease trading. Anyone still holding the product on that date will receive a cash payment equal to VXX’s net asset value on Jan. 29.

Maturing ETN

VXX, like all exchange-traded notes, is a debt note issued by a financial institution—in this case, Barclays. Unlike typical debt notes that pay interest, ETNs pay some pattern of returns—in VXX’s case, it’s the return on short-term VIX futures contracts that measure volatility in equities and is used as a hedge most often.

Packaged in an ETN that on a day-to-day basis trades much like a traditional ETF, traders would hardly know that VXX is technically a debt note, nor would it matter to them. It tracks VIX futures just as it’s supposed to, and it does it well as a trading tool.

But like most debt notes, ETNs such as VXX have a maturity date, when investors receive a lump sum payment and the security ceases to exist. That date, Jan. 30, is approaching fast for VXX, which launched 10 years ago.

Replacement Product

Anyone trading VXX should know what to expect and what to do as the maturity date approaches, while bearing in mind that this ETP is a short-term tactical tool for sophisticated traders and investors, not a buy-and-hold investment.

The most straightforward thing traders can do is switch from trading VXX to its replacement product, the iPath Series B S&P 500 VIX Short Term Futures ETN (VXXB). The two products are nearly identical—both are issued by Barclays, both have 0.89% expense ratios, and most importantly, both track the same S&P 500 VIX Short-Term Futures Index.

For all intents and purposes, VXXB should look and act just like its predecessor, but with the added benefit of continuous trading for the foreseeable future. VXXB, which was issued on Jan. 17 of this year, won’t mature until Jan. 23, 2048—more than 29 years from today.

Indeed, there’s already some evidence that traders are making the switch. Since its launch in January, VXXB has already accumulated more than $230 million in assets, while VXX has shed $545 million in assets in the same period.

Liquidity Chasm

The alternative to immediately swapping VXX for VXXB is to simply continue trading the former. That option might appeal to large institutional traders who desire the superior liquidity that VXX currently provides.

Even after seeing outflows, VXX has averaged daily trading volume of 44.7 million shares ($1.7 billion) over the past 30 days—the sixth-highest of all ETFs, and 83 times more than the 538,177 shares ($20 million) average trading volume for VXXB over the same period.

 

VXXB Volume Picking Up …

 

… But Still Lags VXX

 

As long as this liquidity chasm exists, it may make sense for some large traders to continue trading VXX for now, though even they will have to make the switch at some point.

Seamless Transition?

Theoretically, because it is nearly an identical product, VXXB should eventually absorb all of the assets and liquidity that VXX currently has. But there is some debate about whether that will happen seamlessly.

Bloomberg Senior ETF Analyst Eric Balchunas has argued that it could take months or years before VXXB achieves the levels of liquidity that VXX currently has. On the other hand, ETF.com Managing director Dave Nadig believes VXXB will effortlessly replace VXX, and by January, the newer product will be just as liquid as the old.

Bottom Line

For most traders, the debate doesn’t matter. All they need to know is that VXX is maturing next month and there is a replacement product available now.

That replacement, VXXB, is growing in assets and liquidity, and shares all of the key characteristics of its predecessor.  

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

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