The VIX itself isn’t tradable, so the Credit Suisse product tracks an index holding a hypothetical basket of first- and second-month VIX futures contracts. It rolls those positions on a daily basis to maintain a constant weighted maturity of one month.
Since the VIX futures curve often takes an upward-sloping shape, one of the more unpleasant surprises awaiting unwitting buyers was the massive costs involved in rolling those contracts. Vance Harwood of Six Figure Investing estimated it cost investors 60% a year.
“They were effectively buying insurance against market drops,” said Harwood. “And insurance is often expensive.”
The dynamic can create striking contradictions. At the time of this week’s delisting announcement, TVIX was the best-performing ETP of 2020 amid wild pandemic markets, returning 204% through Friday. Simultaneously it remains among the worst-performing of all time, losing virtually all of its value since inception.
Another danger to investors has been the VIX’s tendency to mean-revert. For every upward spike there is typically a downward move just as vicious, which could leave holders of the ETN nursing percentage losses in the double digits in a single day.
Meanwhile its whale status means the note itself could make things worse.
It’s happened before in another Credit Suisse product. A 2018 surge in stock-market volatility forced the bank to close the VelocityShares Daily Inverse VIX Short Term ETN, or XIV -- leaving a trail of lawsuits in its wake. The note and its peers are believed to have exacerbated moves.
While a spokesperson for the bank declined to comment beyond a press release on the reasons for delisting TVIX, experts point to the challenges of managing the note should another storm of volatility erupt.
“Any ETN that represents a large portion of open interest and volume in its underlying instruments is potentially dangerous for market microstructure,” said Benn Eifert, chief investment officer at QVR Advisors. “A sufficiently large adverse move could wipe out TVIX and leave the issuer holding huge losses.”
Any remaining danger will be greatly ameliorated if TVIX’s assets shrink in the lead up to, and aftermath of, its delisting. A shift to over-the-counter trading usually amounts to a death sentence for such funds, with retail investors unlikely to follow it to the pink sheets. Those who do will likely be holding a note priced at a premium to its underlying index that is difficult to trade.
On Monday, TVIX closed at 9.7% above its NAV, the most since March. It has since erased that premium, while no money has exited the product yet. Going forward, “supply and demand” will play a larger role in determining TVIX’s price than its index, said MRA’s Tom.
For all its drawbacks, TVIX’s sensitivity to the fear gauge combined with its leverage made it a potent way to profit from unrest over the past decade, and it continued to win followers right up until its delisting was announced.
The number of users holding the note on trading platform Robinhood climbed to 26,000 this month versus less than 3,000 at the beginning of February, according to Robintrack, a website unaffiliated with the site that uses its data to show trends in positioning.
“I went long TVIX in early/mid 2019 assuming big kabooms were coming given the state of the world and the complacency,” said Rob Majteles, founder of Treehouse Capital LLC. “I no doubt went long too early, but as things played out, despite the flaws of the product and its costs, I was well rewarded in March 2020.”
This article was provided by Bloomberg News.