The voracious gods of contango force Credit Suisse to reverse-split its VelocityShares Daily 2x VIX Short Term ETN.
Credit Suisse, the Switzerland-based investment bank and asset manager, will serve up a 1-for-10 reverse split on the VelocityShares Daily 2x VIX Short Term ETN (NYSEArca: TVIX) on Dec. 21, after the notes lost almost all their value in the past year.
The reverse split will shrink the number of TVIX shares on the market while pumping up the share’s price 10 times, but it won’t change the value of a shareholder’s investment. TVIX has about $123 million in assets.
TVIX was last trading at $0.88 a share, or 97 percent below its price about a year ago. Part of that price decay is a decrease in volatility.
But exposure to futures contracts linked to the CBOE Volatility Index (VIX) often suffers from contango, a condition wherein each new contract on the futures curve is pricier than the expiring one, meaning money is lost each time exposure is rolled to a new contract. Such futures positions are said to have negative roll yields.
After the 1-for-10 reverse split, TVIX will be trading at $8.80 a share—a price at which bid/ask spreads would amount to a lot less for a given dollar value of an investment than if the shares remained at their current values.
Investors who own a number of TVIX shares that isn’t divisible by 10 will, on Dec. 26, receive one reverse-split-adjusted ETN for every 10 units of TVIX and a cash payment for any odd number of partial units remaining, the company said in the release.
That cash payment will be paid out by Credit Suisse on Jan. 3.
Following the split, TVIX will get a new CUSIP but will keep the same ticker symbol.
Earlier this year, TVIX was the center of a legal frenzy that sought to establish whether Credit Suisse had done all it could to inform investors of the risks associated with the inner working of the leveraged volatility-focused strategy.
In particular, many were concerned that investors didn’t fully understand the impact of so-called roll yields on returns.
Also, TVIX had its creations halted in February following massive inflows that jeopardized the bank’s ability to hedge the ETN’s underlying exposure. The creations were partially resumed in March, at which time the strategy was trading at a hefty premium.
That premium all but evaporated once new shares started to hit the market on March 22, and TVIX’s price dropped precipitously.
Aside from the reverse split, Credit Suisse is also redeeming two bull-and-bear leveraged pairs of palladium and copper strategies on Dec. 31, the company said in a press release
The four metals-related ETNs are:
- VelocityShares 2x Long Palladium ETN (NYSEArca: LPAL)
- VelocityShares 2x Inverse Palladium ETN (NYSEArca: IPAL)
- VelocityShares 2x Long Copper ETN (NYSEArca: LCPR)
- VelocityShares 2x Inverse Copper ETN (NYSEArca: SCPR)
In the early redemption of the metals ETNs, investors will receive a cash payment per ETN “equal to the arithmetic average of the closing indicative values of such ETNs during their respective accelerated valuation periods,” the company said in the release.
That five-day valuation period is expected to be from Dec. 19 to Dec. 26.