‘Volmageddon’ Is History as SEC Greenlights Leveraged VIX ETFs
(Bloomberg) -- Two infamous stock volatility strategies on Wall Street look set for a comeback -- with protective buffers this time round.
The U.S. Securities and Exchange Commission has approved rule changes that pave the way for a pair of ETFs from Volatility Shares LLC to list and trade. The two products will offer leveraged bets on the Cboe Volatility Index, or VIX.
If they sound familiar, it’s because they directly recall the VelocityShares Daily Inverse VIX Short-Term ETN (ticker XIV) and the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) from Credit Suisse Group AG.
XIV was at the heart of the February 2018 meltdown in the U.S. stock market and TVIX was delisted after last year’s Covid turmoil, so allowing their revival was always controversial.
SEC Chair Gary Gensler appeared to acknowledge as much on Monday, with an announcement that the regulator is studying the risks of such “complex” products, as well as potential rule changes to address those risks.
“Though the listing and trading of these products, including the listing and trading of the two ETPs that the Commission voted to approve last Friday, can be consistent with the Exchange Act, that doesn’t mean the products are right for every investor,” he wrote on the SEC website. “I encourage all investors to consider these risks carefully before investing in these products.”
Volatility Shares received the green light to revive the strategies after devising a revamped structure it says will avoid any futures blowups. Both of the new products will be exchange-traded funds instead of notes, meaning they will be backed by assets rather than being an unsecured debt obligation of the issuer.
They’ll also use a time-weighted average price to set closing values, rather than the 4 p.m. VIX settlement price. This broader rebalancing period should avoid creating a spike in trading activity at the close -- and it can be extended, if needed.
That’s crucial because end-of-day rebalancing by XIV is thought to have helped fuel a record one-day jump in volatility on Feb. 5, 2018. The ETN had amassed $1.9 billion in assets. It shuttered and wiped out most investors.
In the two orders, the SEC said a number of commentators on the proposals -- which for one fund is more than a year-old -- raised the events of the 2018 “Volmageddon” episode as an example of potential risks. However, regulators concluded that the planned changes to the strategies were “reasonably designed to help mitigate against the market impact concerns.”
Stuart Barton, co-founder of Volatility Shares, said the SEC had worked diligently with his firm and that the result is “a solution that we think is a more appropriate way to bring these exposures to market.”
While XIV collapsed, some other volatility funds survived the 2018 turmoil. The ProShares Short VIX Short-Term Futures ETF (SVXY) follows a similar shorting strategy betting against swings in stock prices and holds $389 million in assets. However, the issuer dialed down its leverage in the aftermath of the volatility spike.
It did the same for the ProShares Ultra VIX Short-Term Futures (UVXY), a less-leveraged version of TVIX with about $1 billion under management.
TVIX had about $1.5 billion when its delisting was announced, one of a slew of ETNs Credit Suisse pulled to better align products with its growth strategy. Market participants at the time pointed to ongoing scrutiny of such notes after losses stacked up in March’s virus-driven turmoil.
At least two other issuers, Dynamic Shares Trust and Simplify Asset Management, also have plans for new volatility ETFs.
The VIX is an index of 30-day implied volatility for the S&P 500 that’s often known as the market’s fear gauge. It moves inversely to U.S. stocks about 80% of the time.
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