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Source Nomura Voltage Mid-Term ETF

Wer mit steigenden Risiken am US-Aktienmarkt rechnet, kann mit diesem Volatilitäts-ETF einiges an Verlusten abfedern. Das Produkt ist allerdings sehr komplex und für Laien schwer durchschaubar.

Lee Davidson 05.04.2013

Rolle im Portfolio

The Source Nomura Voltage Mid-Term ETF provides investors with nuanced exposure to the expected future volatility of the S&P 500 index as measured by the VIX index. Sophisticated investors with medium- to long-term investment horizons could use this fund to partially hedge their portfolios against future declines in the S&P 500, but must first understand the mechanics of this exotic exposure. Stock market volatility tends to spike in the face of declining share prices. Expected volatility, thus, serves as a proxy for market uncertainty, affording the VIX Index the moniker of "The Fear Index". When investors are fearful and uncertain, they will demand higher expected returns and thus pay less for assets in the present. This relationship between volatility and share prices can make vehicles that follow the VIX good diversifiers for equity-based portfolios. Some assets, like commodities and government bonds, show near-zero correlations to stocks, but volatility has a strong negative correlation with stock prices. Unfortunately, volatility is also a strongly mean-reverting, and as such will theoretically produce zero long-term return.

This offering from Source differentiates itself among other VIX products by tracking the Nomura Voltage Strategy Mid-Term index. The product attempts to capture spikes in volatility, while mitigating the cost of holding a long-volatility position through VIX futures. In order to achieve this objective, Nomura provides volatility adjusted exposure to the S&P 500 VIX Mid-Term Futures Index, allocating between 0% to 100% of the fund to this index and the remainder to a 3 month US Treasury Bill rate. Rebalancing happens daily and is triggered when the volatility of the S&P 500 VIX Mid-Term Futures index changes relative to the previous 30 days. If volatility of the VIX rises above the trailing 30-day average, then the ETF rebalances to hold obtain greater VIX exposure. In general, this means that the higher the volatility of the VIX, the higher the allocation to the VIX.  The rationale is that greater price swings in the VIX index tend to precipitate spikes in the VIX index. Investors should note that Source charges investors 0.075% per rebalance and that rebalancing can be conducted as frequently as daily, potentially creating a hefty drag on returns.

 

Fundamentale Analyse

Equity market volatility tends to exhibit a high degree of mean reversion, much more so than equity prices themselves. After peaking at a record high near 96.4 in October 2008, the spot VIX traded down to a low of just above 15 in early April 2010, before spiking again to 48.2 in May 2010. In April 2011, the VIX dropped to a low of 14.27, before spiking right back up to 48 in August. Since then, the VIX has trended down to its typical range of 15 to 25.

Though market volatility tends to exhibit an acute mean-reverting quality, its behaviour in the wake of the financial crisis has been particularly extreme. Equity markets have not seen such high volatility for such a prolonged period since the 1970s. From 1990 until 2008, VIX reached its height of 45 during the peak of 1998's emerging-markets crisis and rarely strayed above 30.  In general, academics and market practitioners typically expect average market volatility to be in the mid-20s as proxied by the VIX.

Since the spot VIX index is not investable, investors must gain exposure to VIX via futures contracts. Because futures have a finite life, a fund must sell contracts as they near expiry and replace them with contracts with later expiration dates. Typically, as futures contracts near expiry, their prices converge to the spot price. Given this phenomenon, rolling contracts can cause either a positive or negative return, commonly referred to as roll yield. If the prices of longer-dated futures contracts are above the current spot price of the commodity, the market is said to be in a state of contango. If the market is in a state of contango, negative implied roll yield is created since rolling futures contracts would initially result in a loss. The opposite holds for markets in which longer-dated futures price are lower than the spot price, which is called backwardation.

Given that VIX futures have typically been used by institutions to hedge against future volatility, the VIX futures curve generally remains in contango. As a result, a long position in VIX futures will nearly always possess some element of negative roll yield and only be overcome when volatility spikes. The strategy employed by this product seeks to partially mitigate this issue by rebalancing the fund's allocation to the VIX depending on its recent performance. As volatility begins to rise, the fund allocates a larger percentage of its portfolio to the VIX futures index hoping to capture any spike as it occurs. Similarly, Source will wind down the VIX futures position in favour of cash when market volatility declines. While this strategy has capped the upside of a VIX futures investment, it also makes the Source ETF a bit more palatable to buy and hold long-term given that the pernicious effects of contango are partially alleviated. 

 

Indexkonstruktion

The Nomura Voltage Mid-Term Source ETF aims to provide the performance of the Nomura Voltage Strategy Mid-Term 30-day USD TR Index. The index was designed to capture spikes in volatility, while mitigating the cost of holding a long-volatility position through VIX futures. In order to achieve this objective, the index provides volatility adjusted exposure to the S&P 500 VIX Mid-Term Futures Index, allocating between this index and a 3 month US Treasury Bill rate. The allocation to the S&P 500 VIX Mid-Term Futures Index TR can range from 0% to 100% depending on the volatility of that index. Rebalancing happens daily and is triggered when the volatility of the S&P 500 VIX Mid-Term Futures index changes relative to the previous 30 days. If volatility of the VIX rises above the trailing 30-day average, then the ETF rebalances to hold obtain greater VIX exposure. In general, this means that the higher the volatility of the VIX, the higher the allocation to the VIX. The S&P 500 VIX Mid-Term Futures Index, itself, models the return of a continuously rolling long position in volatility futures for a constant maturity of five months by holding fourth, fifth, sixth, and seventh-month VIX futures contracts. The performance of this index will not match that of the spot VIX Index, which is a measure of volatility calculated from the prices of a weighted blend of call and put options on the S&P 500 Index. This fund tracks a volatility futures index because the spot VIX Index is not investable.

 

Fondskonstruktion

The Source Nomura Voltage Mid-Term ETF uses synthetic replication to track the performance of the Nomura Voltage Strategy Mid-Term 30-day USD TR index. Source uses an unfunded swap structure to deliver the index return. Unlike some of Source's other funds which diversify counterparty exposure amongst multiple parties, Source engages Nomura International plc as the sole swap counterparty. Source resets individual swaps to zero when exposure to the swap counterparty reaches 4.5% of the fund’s net asset value, which is below the UCITS prescribed maximum level of 10%. The swaps are also reset whenever there is a creation or redemption in the fund. Individual counterparties deliver a basket composed of European and Asia/Pacific equities to be held at Northern Trust Fiduciary Securities. In exchange for delivering the index's performance, the swap provider receives the performance of this collateral basket, plus a fee. Currently, Source does not engage in securities lending in its ETFs, but will notify investors in advance if that policy changes. The ETF does not distribute dividends. The fund is domiciled in Ireland and trades on the Deutsche Börse and London Stock Exchange.

 

Gebühren

Source levies an ongoing charge of 0.30% on the fund at all times. Additionally, there is an embedded expense of 0.80% on the portion of the ETF allocated to the S&P 500 VIX Mid-Term Futures index. No fee is charged to portion of the ETF allocated to 3 month US Treasury Bills. Finally, Source charges a transaction cost equal to 0.075% for each rebalancing trade. Rebalancing can be done as frequently as daily.

 

Alternativen

The Source Nomura Voltage Mid-Term ETF is far and away the most popular product offering exposure to equity market volatility in Europe. At the time of this writing, the Source product has assets under management (AUM) equal to EUR 111 million. Its closest alternative in terms of underlying methodology happens to be another Source product--the Source Nomura Voltage Short-Term ETF--differing only in terms of the futures contracts it purchases. While the Source Nomura Voltage Mid-Term ETF maintains a constant maturity of five months, the Source Nomura Voltage Short-Term ETF purchases 1 and 2 months VIX futures. As a result, the shorter-term Source ETF will be more sensitive to fluctuations in the spot VIX but will also be more susceptible to contango effects.

Further down the liquidity and size spectrum, the Lyxor ETF S&P 500 VIX Futures Enhanced Roll also provides exposure to the VIX futures market but remains fully invested. Similar to Source, Lyxor recognises the pervasive effects of contango and has sought to remedy this problem by tracking an index that holds medium-term futures in calm periods and shorter-term futures in stress periods. The index alternates between futures contracts based on signals generated from the VIX index in relation to its moving average.

Über den Autor

Lee Davidson  is an ETF analyst with Morningstar Europe.