Banks issue ETNs to raise funds that they can use for lending or other purposes. London-based Barclays, which controls about half the market, listed the first ones in June 2006. Money invested in the securities has increased to about $15.4 billion, according to data compiled by Bloomberg.
Record Levels
Increasing use of exchange-traded products tracking VIX futures are helping drive volume and open interest for those contracts to record levels. VIX futures trading volume rose to a record 533,430 contracts last week on the CBOE, according to data from the largest U.S. options market, which has the exclusive license to trade futures and options on the volatility index.
Trading of VIX futures exceeded 100,000 for the first time on June 16, after rising above 70,000 contracts in November and first passing 40,000 in May 2010. The exchange operated by Chicago-based CBOE Holdings Inc. created them in March 2004.
The price of the VIX is higher than the level of the futures as investors speculate swings will decrease. September futures settled at 26.90 yesterday, or 18 percent below the VIX, while December's closed at 24.75, 25 percent below.
"VIX futures are more expensive than what the market expects they'll be worth in a month, and that suggests that investors are betting on a decline in the VIX," Will Lloyd, head of index products at VelocityShares LLC in New Canaan, Connecticut, said in a telephone interview on Aug. 15.
Biggest Note
Barclays's note, the largest one tracking U.S. volatility by market value, climbed 2.1 percent to $32.87 yesterday after losing 5.7 percent in the previous session. VXX has lost 92 percent since its inception in January 2009, three times the drop in the VIX. The VelocityShares inverse note climbed 6.7 percent in the previous four days as the VIX declined 24 percent and the S&P 500 rose 6.4 percent.
"This tells you individual investors are saying, 'I want in to the market and to bet that volatility mean reverts back down,'" Steve Claussen, chief investment strategist at OptionsHouse LLC, the Chicago-based online brokerage, said in a phone interview on Aug. 12. "But it means that if the market does take another leg down people are going to get crushed. The moves are just phenomenal."
Investors also are making record options bets on a decline in the Barclays note. The ratio of outstanding puts to sell the ETN has risen to 1.5 times the number of calls, the highest since options on the note were listed on exchanges in May 2010. Volume for both puts and calls surged to a record on Aug. 5, with 422,828 contracts changing hands.
The proliferation of volatility-tied, exchange-traded products has made securities tied to the "fear gauge" an asset class, Bob Tull, chief operating officer for Factor Advisors LLC, a New York-based issuer of exchange-traded funds, said in a telephone interview on Aug. 12.
"We see traditional buy-and-hold people who will own a volatility security for an hour, two hours as a means to try and protect their portfolio," he said.