ETFs and ETNs

SDS ProShares UltraShort S&P500 (ETF)

SPXU ProShares UltraPro Short S&P 500 (ETF)

XIV VelocityShares Daily Inverse VIX Short Term ETN
XIV made a higher high in a parabonic rise to compare with the high of 5/1/12!
Meanwhile SP-500 respectively made only 61.8% retracement.
It's a mania or it represents a smart money flow of bulls? 

To understand the nature of an ETN, you'd better read the following article which I quote from:
Stocks quoted in this article:VIX  VXX  TVIX  XIV

If you're like me, you probably don't distinguish much between investing/trading in an ETF (Exchange Traded Fund) and an ETN (Exchange Traded Note). But perhaps I should. This commentary is courtesy of Rick Ferri via Abnormal Returns.
Exchange-traded notes (ETNs) are often confused with exchange-traded funds (ETFs) because they both trade on an exchange and both have creation and redemption characteristics. But that's where the similarities end. ETNs are not "funds" under 1940 Investment Company Act regulations. They are a type of debt security sold by finance companies that trade on exchanges.
An ETN's return is a promise that is typically linked to a market index or other benchmark. However, unlike ETFs, ETNs do not buy or hold assets to replicate or approximate the performance of the underlying index. Investors are simply buying a promise to pay a market return by the issuer of the note if it is held to maturity. You can learn the details about ETNs and other exchange-traded products in The ETF Book: All You Need to Know About Exchange-traded Funds.
On July 10, the Financial Industry Regulatory Authority (FINRA) issued an Investor Alert titled Exchange-Traded Notes—Avoid Unpleasant Surprises to inform investors of the features and unique risks of ETNs. As the Investor Alert explains, "an ETN's closing indicative value is computed by the issuer and is distinct from an ETN's market price, which is the price at which an ETN trades in the secondary market. Investors should understand that an ETN's market price can deviate, sometimes significantly, from its indicative value." In plain English, this means that the closing price of an ETN may be far off the actual value of the index it is promising.
Why does it matter? Well … guess how pretty much all tradable VIX (CBOE Market Volatility Index) products are structured? As ETNs.
VXX? Check. It's official name is the iPath S&P 500 VIX Short-Term Futures ETN.
TVIX? You bet. The VelocityShares Daily 2x VIX Short-Term ETN.
XIV? Indeed. It's the VelocityShares Daily Inverse VIX Short Term ETN.
And so on.
We've gone over and over the contango risk associated with VXX. Whenever VIX futures are in contango, which is virtually always, VXX loses money rolling out in time from relatively cheap futures/swaps to more expensive futures/swaps. We've also touched on the compounding risk of a tracker like XIV and most especially a leveraged tracker like TVIX. A tracking ETF or ETN simply loses value each successive time the "underlying" revisits a price.
But we've spent precious little time fretting about the structures of the products themselves, save for when TVIX stopped creating new shares, then restarted again.
So yes, the structures of these products pose problems in and of themselves. Here's the list of risks he itemizes, via FINRA.

  • Credit Risk: ETNs are unsecured debt obligations of the issuer.
  • Market Risk: As the value of an index changes with market forces, so will the value of the ETN in general, which can result in a loss of principal for investors.
  • Liquidity Risk: Although ETNs are exchange-traded, a trading market may not develop.
  • Price-Tracking Risk: Investors should be wary of buying at a price that varies significantly from closing and intraday indicative values.
  • Holding-Period Risk: Some leveraged, inverse and inverse-leveraged ETNs, are designed to be short-term trading tools, and the performance of these products over long periods can differ significantly from the stated multiple of the performance (or inverse of the performance) of the underlying index or benchmark during the same period.
  • Call, Early Redemption and Acceleration Risk: Some ETNs are callable at the issuer's discretion.
  • Conflicts of Interest: The issuer of the notes may engage in trading activities that are at odds with investors who hold the notes (shorting strategies, for instance).
Well, "Market Risk" pretty much applies to any product, and "Liquidity Risk" isn't a big issue in the popular VIX ETNs. "Credit Risk" hasn't reared its ugly head yet, though that's one of those things that never worries anyone until it becomes all anyone worries about.
"Price Tracking Risk" came to the fore in a big way in the TVIX Creation saga. It traded at huge premiums to NAV for a month before abruptly imploding. Many expensive lessons were learned.
"Holding Period Risk" is probably the biggest problem here. They're trading vehicles, plain and simple. Don't ever just "hold" any of them -- they're all going to zero over time.
As to early redemption? Not a real concern, given they just drift over time. VXX does reserve the right to reverse split, and in fact that's likely to happen relatively soon. But last I checked, that doesn't add any actual value.
And finally, Conflict of Interest? Um, yes, the issuers all can trade the products. But hey, Barclays backs VXX -- no way they would ever manipulate a product and put their good name on the line.
Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.

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