Your Favorite Way to Play Volatility Will Be Gone Next Month

(Bloomberg) -- The largest trading vehicle tracking the VIX is disappearing at the end of January. Were you aware?

VXX, which sees an average $1.5 billion of activity every day, will mature on Jan. 30, 2019, in accordance with its rules. As an exchange-traded note -- its full name is the iPath S&P 500 VIX Short-Term Futures ETN -- VXX is a debt obligation with a fixed lifespan, unlike an exchange-traded fund, which is a portfolio of assets that behaves like an ordinary stock. Anyone who holds the ETN to maturity will receive a cash payout equal to its value.

For now, investors seem unperturbed. As stocks have slumped, bounced, and slumped again, volatility has soared and the doomed note has seen even more activity than usual. The $833 million product, which offers exposure to futures contracts on the Cboe Volatility Index, is often one of the 10 most traded ETPs of the day. Meanwhile, the replacement ETN is one-fifth its size and has 0.1 percent of its volume. That’s a huge difference in liquidity.

Your Favorite Way to Play Volatility Will Be Gone Next Month

“Many traders probably don’t know it is maturing, and the ones that do are just too addicted to VXX’s oceanic liquidity to leave,” said Eric Balchunas, an ETF analyst at Bloomberg Intelligence. “This is likely to be a messier and slower move than people assume because you can’t transfer liquidity the same way you can transfer assets.”

Despite accounting for less than 1 percent of the broader $3.5 trillion ETP market, ETNs came sharply into focus earlier this year, when a Credit Suisse Group AG note known by its ticker XIV that bet on low volatility lost 90 percent of its value and was abruptly terminated.

Structure Confusion

ETNs often offer exposure that can’t easily be packaged into a fund. But their structure can muddle investors more accustomed to using ETFs.

It’s a challenge that Barclays Plc -- VXX’s issuer -- understands all too well. Investors failed to budge when the bank retired or replaced half of its U.S. lineup in April. While some money has since left the products, more than $600 million remains in 32 notes that the bank delisted and are now harder to trade.

A spokeswoman from Barclays declined to comment.

Volatility fans could opt to buy futures directly until the replacement product’s liquidity grows, Bloomberg’s Balchunas wrote in a note earlier this year. They could also use one or more of the 10 other U.S. ETPs that wager on market turmoil.

However, interest in VXX’s replacement -- known by its ticker VXXB -- appears to be improving. Almost $100 million of trades took place on Dec. 3, a record for the note.

“VXX is very significant to the market,” Balchunas said. “But it’s not the end of the world for its fans since there’s an exact replica from the same issuer, in the same structure, ready to take its place.”

©2018 Bloomberg L.P.