ETN Implodes


The iPath S&P 500 VIX Short-Term Futures exchange-traded note (VXX), supposedly a hedge against stock market volatility, crashed last week losing over 10% of its market value. The sharp drop, which sent the VXX to an all-time low, occurred as positive economic news in the U.S. and Europe sent the S&P 500 stock index sharply upward. The VXX is designed to zag as the stock market zigs, and it did just that. (“ETN tied to VIX vaporizes as S&P rises on job data,” by Jason Kephart, InvestmentNews).

The VXX holds short-term futures contracts linked to the Chicago Board Options Exchange Market Volatility Index.

According to the article, the unveiling European Central Bank’s bond-buying plan and supposedly positive employment news propelled the U.S. stock market to highs last week, sending the $2 billion VXX down by 10.5% to an all-time low of just under $10 a share.

More than $5.8 billion has flowed into VXX in the past 3 years. In September 2010, the VXX reached $2.3 billion in assets, according to Lipper Inc. All the while, the VXX has lost value.

Volatility is nothing new for this purported volatility hedge. Since being launched in January 2009 at $400 a share, the VXX has headed straight for the basement, according to the article. An investment of $10,000 in January 2009 is worth about $250 today.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.