UPDATE: Collateral Damage: TVIX's Fall Could Have Broader Implications (TVIX, VXX, CS)
Already ensconced in controversy and veiled in complexity, volatility ETNs arguably suffered a major blow today as the VelocityShares Daily 2x VIX Short-Term ETN (NYSE: TVIX) became the story du jour for plunging $4.32, or almost 30%, to settle at $10.11. Volume in TVIX topped 28.6 million shares compared to a three-month daily average of 11.33 million.
In the after-hours session, TVIX is down another 1.2% at $9.99. The ETN traded as low as $9.70 during regular trading hours, marking the first time since its debut in late 2010 that it has traded below $10. In February, TVIX fell below $13, but never even flirted with $12, let alone $10. On November 30, 2010 TVIX traded over $112.
While TVIX isn't an exchange-traded product most investors are familiar with, the ETN's lack of popularity prior to today belies its size. Simply put, TVIX was not a small ETN at the start of today. In fact, it had over $500 million in AUM. That's almost the same size as the Market Vectors Indonesia ETF (NYSE: IDX).
What folks are having a hard time understanding is how is TVIX getting taken to the woodshed while ETNs such as the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) are trading higher. To be frank, all three have some of the ugliest charts around.
As we noted earlier today, TVIX's bubble bursting has a lot to do with the fund trading at rich premium to its net asset value, a situation brought about by Credit Suisse (NYSE: CS) halting the creation of new TVIX shares last month.
Speaking of Credit Suisse, it's may not be coincidence that its U.S.-listed shares traded down almost 2% as TVIX plunges. ETN's are bond instruments, not funds, and though ETNs pay no interest the way a corporate bond or a U.S. Treasury does, by purchasing shares of TVIX, one becomes an UNSECURED CREDITOR of Credit Suisse. Translation: ALL ETNs have the potential to expose traders and investors to credit risk.
Last month, FT Alphaville broached the subject of TVIX buyers running into the ETN with Credit Suisse's creation limit in mind. So it's not that far flung that punishing TVIX could be a method of backdoor shorting Credit Suisse. At the very least, beating up TVIX today has proven to be a small pain for Credit Suisse's ADRs.
Along those lines, it would not be stunning to see Barclays (NYSE: BCS) trade lower if VXZ ever experiences a day like TVIX has today. Barclays is the parent company of iPath. Buy VXZ or VXX and you become a Barclays creditor. Barclays and UBS (NYSE: UBS), two other major ETN sponsors, also closed lower today.
Oh yeah, that sigh of relief heard across the ETF universe today came courtesy of ProShares and Direxion. The two largest U.S. issuers of inverse and leveraged ETFs are probably quite happy there's a new exchange-traded products whipping boy and it's TVIX, not the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) or a similar fund.
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