Barclays To Redeem VZZ Due To Price Drop

July 01, 2011

Barclays will redeem its volatility ETN 'VZZ' after its price dropped below the crucial $10 barrier.

Barclays Bank will automatically redeem its iPath Long Enhanced S&P 500 Mid-Term Futures ETN (NYSEArca: VZZ) because the price of the notes fell just below the $10 per share redemption barrier today, a crucial date. Indeed, July 1, 2011 is the date of the automatic redemption as described in the prospectus, the New York-based company said in a press release.

“An automatic termination event occurs when the intraday indicative note value of the notes on any trading day is equal to or less than the automatic termination level of $10.00," iPath said in the press release.

VZZ, which had $12.8 million in assets as of June 30, was halted by Arca, the New York Stock Exchange’s electronic trading platform, after the ETN fell to $9.98 a share. That was $1.82, or 15 percent lower on the day.

The actual redemption date is the “fifth business day following the automatic termination date,” according to the press release. The company said further details about the automatic redemption, including the redemption value, will be made public on iPath’s website as soon as possible after the close of business on July 1.

The notes were brought to market in November 2009. Their price had fallen by more than 50 percent in the past six months and by more than 60 percent in the past year.

VZZ’s 15 percent sharp slide today could have been related to the looming possibility of the automatic redemption, as its nonleveraged counterpart, the iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ), was down just about 4 percent at the time Arca halted trade in VZZ.

However, the Dow Jones industrial average was up by more than 1 percent on a surprisingly strong report on U.S. manufacturing, which nearly always means volatility-related securities will lose value.

Beyond VZZ

While some of iPath’s other, nonleveraged, volatility-related ETNs have also lost value in recent months, they don’t have the automatic redemption features in their respective prospectuses.

Those ETNs include the VXZ, the nonleveraged version of VZZ, as well as the S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX). Both have had success attracting assets, particularly VXX.

VXX, the short-term volatility futures product, had $1.14 billion in assets as of yesterday’s close, and seems to quickly gather assets when financial markets are roiled. Its returns are another story, however, as Matt Hougan blogged about a bit more than a year ago.

VXX was down more than 4 percent on Friday, and has declined almost 45 percent in the past six months. Worse yet, it has fallen more than 80 percent in the past year and more than 90 percent in the past two years. It was launched in January 2009.

The midterm volatility ETN, VXZ, as noted, was also trading more than 4 percent lower on Friday afternoon, at $48.04 a share. It has declined more than 20 percent in the past six months and more than 40 percent in the past two years. It too was launched in January 2009.

But it’s also had success gathering assets, though it had an usually large redemption on Wednesday, of more than $257 million, or about a third of its assets. It wasn’t immediately clear what prompted such a large and unusual shift in assets. It had $526.2 million in assets as of June 30.

Tactical Products

As bad as those returns may seem, industry sources are quick to stress that securities such as VXX or VXZ are more tactically oriented, and that it’s useful to view them more as insurance-type products that rise when the value of most of the riskier assets in an investor’s portfolios are dropping.

In other words, it doesn’t make sense to own such securities alone. They ought to play a particular and peripheral role in any investment plan, ETN industry sources say.

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