BY JEA YU Updated Jun 25, 2019
The Velocity Shares Daily 2X VIX Short-Term ETN (NYSEARCA: TVIX) is an exchange-traded note (ETN) that tracks an index of futures contracts on the Standard & Poor's 500 (S&P 500) VIX Short-Term Futures Index, with 200% leverage on the volatility moves. The TVIX was issued by Credit Suisse Securities (NYSE: CS) on Nov. 29, 2010. Investors should be aware that, unlike an exchange-traded-fund (ETF), an ETN does not take positions in the underlying tracking instrument. Instead, ETNs are senior unsecured debt obligations of an issuing financial institution that pays no interest and are subject to credit risk. ETNs do not incur tracking errors like ETFs do since there is no buying and selling of the underlying tracking instrument. In fact, ETNs are left strictly to market forces to determine how closely they track the underlying index. While this creates a truly free market pricing mechanism, it can also backfire disastrously when structural or non-correlated anomaly situations arise.
Contango to Stock Splits
Investors should be aware that the TVIX incurs monthly price decay of 8 to 13%, depending on market volatility. Less volatility equates to more contango, which erodes the pricing by 80 to 90% annually. For this reason, Credit Suisse routinely implements a 10 to 1 stock split when the price falls under certain price thresholds ranging from $5 to $1 per share. The TVIX has had several 10 to 1 stock splits since inception, the last of which took place on June 08, 2018. This ETN is thus best reserved for very short-term trading purposes.
Institutional Ownership and Activity
The TVIX had 15.68 million outstanding ETN shares as of October 2018. As the issuer of the TVIX ETN, Credit Suisse is the top institutional holder, with 26% of the outstanding shares, followed by algorithmic trading and market making firms Citadel Advisors with 6%, Susquehanna Group with 5% and Flow Traders LLC with 4%. The total institutional holdings amount to 168% of the total float, as the time of the report on October 25, 2018. Institutional ownership reporting can lag by up to four weeks depending on the particular institution. The exceptionally high ownership indicates that the excess 68% of the shares were loaned out for shorting transactions at the time of the reported holdings. Due to the exceptionally fast price decay, it is not uncommon for institutions to box a long TVIX position by short-selling the identical number of TVIX shares, at least temporarily, to buy time for the next move.
Investor Type and Style
TVIX was not designed to be held for extended periods of time. The majority of the institutional holders either make markets in the TVIX electronically or utilize it for various high-frequency-trading (HFT) strategy programs. Brokers accounted for the largest position changes, averaging over 25,000 shares per transaction, followed by investment advisors with under 5,000 shares. Growth was the top investment style among holders. The top three new net buy transactions were 1.65 million shares by Credit Suisse, 714,000 by Citadel, and 592,000 by SG America. The top three new net sales were Virtu Financial BD LLC (NASDAQ: VIRT) with negative 19,200 shares and Gainplan LLC selling 10,000 shares. As market volatility rises, as with the choppy markets toward the Fall of 2018, more investors want a long exposure to volatility and so buy more TVIX, on average.
2012 TVIX Disaster
Issuer Credit Suisse stopped issuing TVIX new shares in February 2012. Due to the limited supply, the TVIX started to rise as premiums between the net asset value (NAV) and the market price had risen as high as 90%. Retail investors were in for a rude awakening on March 22, 2012, when the TVIX collapsed 29.3% and proceeded to fall another 29.8% the following day. The TVIX fell from $14.43 to a low of $7.16, a drop of over 50% in 48 hours. Even more shocking was that the price collapse was completely unrelated to the underlying moves of the VIX Index. In fact, the VIX Index actually rose higher on that second day. Immediately after the sell-off, Credit Suisse released a statement that it would resume issuing shares again. The suspicious timing of the sell-off and news release led to many class-action lawsuits. This is a cautionary tale for investors to always check the premium between the market price and NAV of an ETN product. Most importantly, the TVIX pricing is completely market driven without structured pricing mechanisms in place.
It is not a product for long-term investment, nor for unsophisticated investors.
The Bottom Line
VIX ETFs like the TVIX leveraged ETN that is useful for trading short-term moved in the volatility of the S&P 500 index. But, because of its structure using futures contracts, the price tends to decay rapidly, leading to several stock splits and a steadily decreasing share price over time.
