Is UVXY Benefiting From TVIX’s Woes?

February 24, 2012


It’s positively complex compared to a futures-based investment strategy in an ETN wrapper.

An ETN like TVIX, even though it is serving up futures exposure, is taxed much like a stock fund. To begin with, that means there’s no tax bill until the ETN is sold – or until it is called or matures. Long-term gains of more than a year are taxed at 15 percent, and short-term gains are taxed as ordinary income.

Still, if you can’t buy TVIX and you really want to own something like it, an ETF like UVXY will do just fine.

Moreover, an ETF doesn’t carry the credit risk that an ETN does, and a fund holder knows exactly what’s in the portfolio—namely futures contracts—because that’s what the prospectus demands.

With an ETN, you never know for sure what you own, because the issuer’s only obligation is to deliver the noteholder the underlying returns of the index. Prospectuses ETNs are registered under don’t require issuers to specify how they have to deliver those returns. There’s a black box aspect to it.

A Hefty Premium

Actually, saying TVIX is no longer available to an interested buyer isn’t exactly true.

It’s available, but it’s trading at a hefty premium to its net asset value. Yesterday that premium was about 6 percent and today, on Feb. 23, TVIX’s closing price of $16 per share was at a premium to its NAV of almost 16 percent. It basically had no premium on Tuesday, the day before Credit Suisse halted creations.

“If you’re long, it presents a good selling opportunity,” Weisbruch said.

Also looming as a possibility is that Credit Suisse may decide to resume creations. After all, it did say in the terse press release it issued on Wednesday that the halt was "temporary." Should that day come to pass, much of the premium will vanish. While Credit Suisse hasn’t said much about the affair, it seems clear that it’s taking a hard look at a rapidly evolving situation.


Find your next ETF

Reset All