First US Listed European Volatility ETNs Launch

Volatility―or more specifically, the lack thereof―has been in the news recently, as the CBOE Volatility Index (VIX) fell below 10 earlier this month, the lowest level in a decade. The calmness in the stock market has perplexed many and sent ETFs tied to the VIX to new records.

The largest products in the space, the $862 million iPath S&P 500 VIX Short-Term Futures ETN (VXX), down 42% year-to-date, fell to a record low on Monday, while the $746 million VelocityShares Daily Inverse VIX Short-Term ETN (XIV), up 63% year-to-date, rose to a record high.

Those are big swings, but not unusual. Volatility exchange-traded products (ETFs and ETNs) are routinely some of the biggest movers in the market, something that makes them attractive to aggressive traders. They're also used extensively for hedging and other purposes.

Taking advantage of the popularity of volatility products, VelocityShares launched a pair of new volatility ETNs this week. But these aren't your typical VIX-based products.

First European Volatility ETPs

The VelocityShares 1x Long VSTOXX Futures ETN (EVIX) and the VelocityShares 1x Daily Inverse VSTOXX Futures ETN (EXIV), both listed on the Bats exchange, which is owned by ETF.com's parent company, CBOE, are the first products to offer exposure to volatility on European stocks. They have expense ratios of 1.35%

The two exchange-traded notes provide long and short exposure, respectively, to the EURO STOXX 50 Volatility (VSTOXX) futures. VSTOXX is a gauge similar to the VIX in the U.S. Just as the VIX is calculated based on implied volatilities of short-term S&P 500 options, VSTOXX is calculated based on implied volatilities of short-term EURO STOXX 50 options.

Currently, VSTOXX is trading at 17.4, compared with its long-term average of 25. For comparison, the long-term average for the VIX is 19.6.

VSTOXX Systematically Higher Than VIX

According to Nick Cherney, senior vice president and head of exchange-traded products for VelocityShares' parent company Janus Capital, the VSTOXX is systematically elevated relative to the VIX. A lot of that has to do with the fact that the underlying stock index for VSTOXX has only 50 components compared with 500 for the VIX.

On the other hand, the contango―the difference between front-month futures and subsequent contracts―is generally lower for VSTOXX compared with VIX.
 

"As a result, there's interesting trades that could be put on in terms of capturing the roll yield in U.S. volatility while hedging and paying the roll yield in European volatility," explained Cherney.

Of course, EVIX and EXIV can be used to make straightforward directional bets on European volatility also.

"There's a broad array of uses for these products. Most users will be short-term institutional traders that have systematic trading strategies that they deploy," he said.

Why Now?

Cherney noted that interest in European volatility futures has increased recently due to geopolitical factors, something that's helped enable EVIX and EXIV come to market.

"These are products that I've been interested in launching since launching VXX in 2009," said Cherney, who previously worked for Barclays before starting VelocityShares.

"What enabled us to launch VXX when I was at Barclays was that the liquidity in the underlying VIX futures got to be adequate, which, at the time, was $50 million a day in trading volume,” he added. “That's what we've been waiting for in VSTOXX: enough liquidity in the underlying futures to make the products viable. We reached that level about a year ago."

"One of the reasons those volumes have increased is because of the macroeconomic environment, where people are increasingly wanting to differentiate European economic conditions relative to the U.S.," Cherney noted. "The geopolitical factors since last year have heightened that with Brexit, the French elections, Trump and all those things."

Cherney hopes that the heightened focus on European equities and volatility futures translates into asset gains for EVIX and EXIV. Both products currently have about $25 million in assets under management.

Contact Sumit Roy at [email protected]