TVIX has emerged as a go-to vehicle for individual investors looking to wager on the stock market’s swings.
The number of users holding the note on trading platform Robinhood climbed to 26,000 this month, according to Robintrack, a website unaffiliated with the site that uses its data to show trends in positioning. That compares to under 3,000 at the beginning of February.
It seems likely this factored into the Credit Suisse decision. Leveraged ETNs can significantly outperform over short periods, but experience huge deviations from the assets they track at times of turbulence and underperform over the long term thanks to daily price adjustments.
In other words, such ETNs will trend toward zero if purchased as a buy-and-hold investment, according to Nate Geraci, president of investment-advisory firm the ETF Store. Renewed regulatory scrutiny and the risk that retail investors don’t fully appreciate those nuances may have pushed banks away from the space, he said.
“Do some of those investors understand the risk? Sure. Do they all? There’s no question that they do not,” Geraci said. For issuers “it’s reputation risk, it’s their ability to hedge the underlying exposure, and to a certain degree, some of these banks may just want to clean up their balance sheet,” he said.
TVIX had gained 204% this year through Friday, but an investor who bought at the start of 2019 and sold at the end would have lost almost everything. The product has also regularly conducted reverse share splits -- a practice of reducing the number of shares outstanding in order to increase their value, usually to avoid delisting.
Still, thanks to its expense ratio of 1.65%, the ETN was undoubtedly a good earner for Credit Suisse. That may be one reason the bank hasn’t killed the products outright -- instead it says the nine notes can still trade on an over-the-counter basis after their delisting next month.
Meanwhile, analysts are split about what happens next.
As Credit Suisse and other banks retreat from the market, Ptak at Morningstar reckons it’s unlikely that other issuers will step up to fill the void, while Rosenbluth expects the number of ETNs to continue to dwindle over the next five years.
But TVIX’s popularity could motivate other issuers to launch similar volatility-linked products, said Greenwich Associates’s Ken Monahan.
“My guess is that someone will pick it up,” said Monahan, a senior analyst covering market structure and technology. “The difficulty is that a firm like Credit Suisse starts out with a huge advantage because it has a huge distribution network. But my guess is the independent shops will try.”
This article was provided by Bloomberg News.