3 Intelligent ETP’s with Conditional exposure

Apr 11 2012

With cross country equity correlations up, and the same accross most asset classes, I believe it is evident prudent Investors, need to complement their portfolios with an extreme event (High Volatility) overlay portfolio. Problem is that standard ETP based solutions for such are mainly based on CDS or VIX futures. Such "Insurance" product are rather expensive in times of normal volatility levels, and hence not a valid permanent solution.

Artemis Capital Management has made a nice document and video that neatly describe the time varying nature of the VIX term-structure.

Below I have listed 3 ETP that are relevant for those of us, who dont want to monitor the market on a day-to-day basis. They are structured to give conditional exposure to a VIX overlay dependent on the market regime, and hence provide an intelligent extreme event overlay.

The Barclays ETN+ S&P VEQTOR ETNs are senior, unsecured debt securities issued by Barclays Bank PLC that are linked to the performance of the S&P 500® Dynamic VEQTOR Total Return Index. The Index seeks to provide investors with broad equity market exposure with an implied volatility hedge by dynamically allocating its notional investments among three components: equity, volatility and cash. The equity component of the Index is represented by the S&P 500® Total Return Index™ and the volatility component of the Index is represented by the S&P 500® VIX Short-Term Futures™ Index. (ISIN: US06740C3372 please note it is an ETN)

The following two ETP's can be used as overlay for your existing portfolio.

The Nomura Voltage Mid-Term Source ETF aims to provide the performance of the Nomura Voltage Strategy Mid-Term 30-day USD TR Index.Nomura Voltage Strategy Mid-Term 30-day USD TR Index aims to capture spikes in volatility, while mitigating the cost of holding a systematically long volatility position. It provides volatility-adjusted exposure to the S&P 500 VIX Mid-Term Futures Index, a highly liquid and transparent volatility benchmark, allocating between this index and 3 month US Treasury Bills. The allocation to the Index can be between 0% and 100% and depends on the volatility of that Index – the higher the relative volatility, the higher the allocation. This allows for a reactive tactical model, which rebalances on a daily basis unlike vanilla options or most OTC volatility instruments (ISIN: DE000A1JQQZ6)

The J.P. Morgan Macro Hedge US TR Source ETF aims to provide the performance of the J.P. Morgan Macro Hedge US TR Index. The J.P. Morgan Macro Hedge US TR Index aims to capture spikes in equity market volatility, while generating a positive return in normal market conditions. It takes a combination of long and short exposure to futures on the CBOE Volatility Index (“VIX”).

• When the VIX futures curve is in backwardation (typically in times of market stress), the Reference Index takes long exposure only. This allows it to capture spikes in volatility.

• When the VIX futures curve is in contango (typically in normal market conditions), a long futures position incurs a negative roll yield. The Reference Index therefore takes both a long position and an opportunistic short position, in a nearer-term futures contract. By adding the short position, the Reference Index aims to offset the negative roll yield and potentially generate a positive return. (ISIN: IE00B3P1F038)