Barclays Serves Up A ‘Plan B’ To VZZ

July 11, 2011

On the very day VZZ was redeemed, iPath replaced it with an identical new ETN.

Barclays Capital, the company behind the iPath family of exchange-traded notes, rolled out a new version of the double-exposure iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN that will trade under the symbol (NYSEArca: VZZB) on the very day that the first version, “VZZ,” is being redeemed.

VZZ is being redeemed because it traded under its $10 redemption barrier. VZZ’s automatic redemption feature was triggered because that barrier was breached on July 1, a crucial date explicitly identified in the notes’ prospectus. The redemption value is $10 a share.

“Exchange-traded products, by and large, are bought by investors looking to access certain market returns, as opposed to being sold by the issuer via direct sales efforts,” Tim Edwards, a Barclays Capital vice president in charge of ETN product development, said in a telephone interview on July 11.

“Every product that we launch is in response to a known or anticipated investor demand, and we continue to see investor demand for exposure to volatility in a capital-efficient way,” Edwards added,

The quick timing of the launch is reflective of exchange-traded products that are registered under the Securities Act of 1933. They don’t go through the same painstaking process that ETFs registered under the Investment Company of 1940 do. In the case of ’33 Act securities, it can sometimes be a matter of days to get them through the SEC, while ’40 Act Fund usually take months.

“The launch today demonstrates our ongoing commitment to providing investors with efficient access to the U.S. volatility markets, without tracking error or resets,” Johnny Wu, an iPath executive in charge of investor solutions for the Americas, said in a July 11 press release.

Wu noted that iPath’s leveraged and inverse ETNs, unlike most competing ETF products, are designed with a leverage factor that’s locked in at the point of purchase, helping produce returns that more closely track indexes without so-called path dependency over periods longer than a single trading day.

VZZB was listed at $30 a share, the same price VZZ had at its inception. The new ETN, like VZZ will also have an automatic redemption threshold of $10 a share. VZZB last traded on Monday afternoon at $31.73, and bids are at $32.10 and offers are at $32.17, according to data on Yahoo Finance.

That consistent with volatile in the stock market related to more anxiety surrounding Europe’s sovereign debt crisis. The Dow Jones industrial average was down almost 160 points, or 1.27 percent at 12,496.49 on talk that Italy – and not just Greece -- was likely to have a difficult time honoring its debt obligations.

Losing Ground

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 $1.12 billion in assets as of Friday’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. 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.

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.

Also, some they're quite like options contracts, and the loss in value of a security like VZZ is analagous to an option an investor purchased that expires worthless. Also, the automatic redemption mechanism Barclays uses on its leveraged ETNs is something like a stop-loss order, the protects investors from losing too much.

VZZ, the leveraged ETN that’s being redeemed today, had $10.8 million in assets as of July 8, was first halted by Arca on July 1, the day that it to $9.98 a share.

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