Dwarfed Returns
The VIX is a measure of future stock-market volatility derived from options prices on the Standard & Poor’s 500 Index.
Even as investor holdings surge, returns on the securities have been dwarfed by stock-market gains.
Exchange-traded notes returned an average 2.9 percent in the 12 months through April 16, data compiled by Bloomberg show. The S&P 500 gained 21 percent with reinvested dividends over the same span, while dollar-denominated bank bonds tracked by a Bank of America Merrill Lynch index returned 2.2 percent.
ETNs gained notoriety in February 2012 with the TVIX, a security that’s based on shifts in volatility.
Credit Suisse, which issues the note, stopped selling new offerings of them that month. Rising investor demand bumped up against the bank’s preset limits for outstanding shares, it said at the time. The TVIX ended up veering as much as 89 percent away from the index it’s supposed to reflect.
Short Selling
The bank started issuing more TVIX notes in March 2012. In July that year, the Financial Industry Regulatory Authority, a non-governmental watchdog group, issued a warning that ETNs may trade at a higher price than their underlying index.
The TVIX declined more than 75 percent in the past year.
ETNs were introduced in the U.S. in 2006, when the SEC permitted Barclays to sell two relatively simple securities. In that period the universe of ETNs has expanded to about 200 securities that use leverage, short-selling, and other more complex designs.