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I read the first few Google results, including this, and I still don't understand.quote:Unlike stocks, owning VXX does not give you a share of a corporation. There are no sales, no quarterly reports, no profit/loss, no PE ratio, and no prospect of ever getting dividends. Forget about doing fundamental style analysis on VXX. An ETF makes sense to me. This doesn't. I know I am somehow being dense, but how can you have a fund, with a dollar value, which is based on a hypothetical portfolio?? What is actually in it? How does it have any value at all?
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Oct 24, 2014 15:49
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| # ? Apr 24, 2024 04:12 |
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Rastor posted:What is actually in it? Nothing. Barclays is basically shorting volatility, plus pocketing the fees from the ETN. Rastor posted:How does it have any value at all? It has value because people believe Barclays won't pull a Lehman Bros anytime soon.
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Oct 26, 2014 01:30
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Rastor posted:I read the first few Google results, including this, and I still don't understand. How does it have any value? Because there is in fact a redemption process that can be done anytime prior to the usual 30 yr term of the note. Retail investors likely do not have the means to participate in them due to the huge minimums, but like ETF's, the creation and redemption process by instituional investors keeps ETN's hovering around the NAV of the underlying hypothetical portfolio. So no, it is not because people don't think Barclay will pull a Lehman, but because huge arbitrage opportunities would exist for immediate gain if the price deviated sharply. The fact that it is immediately redeemable for arbitrage purposes means they should track the underlying portfolio or strategy near perfectly. Presumably, if Barclay's credit rating gets downgraded, the ETN should still track the underlying due to the arbitrage mechanism, unlike a bond which would immediately drop in value. This is why it may not behave like a single corporate bond until things start looking really bad. Edit: i actually know this firsthand because I sold an ETN a day after Barclay got downgraded and suffered no discount to NAV. Now if Barclay goes bust, things can get bad quickly, so I would not use these as longterm instruments. I think ETN's are generally bad ideas but the way it is designed means it should work great until it doesn't. Generally, I would avoid these products. 80k fucked around with this message at 02:23 on Oct 26, 2014 |
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Oct 26, 2014 02:08
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posh spaz posted:Nothing. Barclays is basically shorting volatility, plus pocketing the fees from the ETN. 80k posted:So no, it is not because people don't think Barclay will pull a Lehman, but because huge arbitrage opportunities would exist for immediate gain if the price deviated sharply. The fact that it is immediately redeemable for arbitrage purposes means they should track the underlying portfolio or strategy near perfectly. Ah, that must be this part of the previous link I was referring to: quote:Wholesalers called “Authorized Participants” (APs) will at times intervene in the market if the trading value of VXX diverges too much from the IV value. If VXX is trading enough below the index they start buying large blocks of VXX—which tends to drive the price up, and if it’s trading above they will short VXX. The APs have an agreement with Barclays that allows them to do these restorative maneuvers at a profit, so they are highly motivated to keep VXX’s tracking in good shape. I'm still not sure I follow. I guess I'm saying I need an "explain like I'm five" on this.
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Oct 26, 2014 03:53
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Rastor posted:OK you short a stock by borrowing it. How do you short "volatility"? If AP's have access to redeem at the value of the underlying (hypothetical portfolio of Vix futures), then if VXX trades at a discount, AP's would buy large amounts (driving up the price) and redeem them at a profit. If VXX trades at a premium, they would short them (driving the price down) and cover with newly created shares at the NAV of the underlying Vix futures. It is this mechanism that corrects the price. You mention that you understand ETF's, but not ETN's, but they both work the same way in regards to how institutional investors arbitrage away any discounts and premiums. If the same mechanism did not exist for ETF's, there would be very large discounts and premiums to NAV, and would make them very poor trading vehicles and also be inappropriate for longterm investors. Of course, ETN's and ETF's are different for a more important reason, which is the risk of unsecured debt present in ETN's. This is why ETN's are bad ideas for longterm investments. That said, VXX is terrible as a longterm investment anyway. A VIX futures should stay in contango (negative roll yield) which means the value is always decaying.
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Oct 26, 2014 04:13
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80k posted:How does it have any value? Because there is in fact a redemption process that can be done anytime prior to the usual 30 yr term of the note. I think you're over-complicating this issue. ETNs are, fundamentally, unsecured senior debts issued by a bank. They are backed only by the credit of the institution. It's really not any different from any other unsecured senior note. You're paying money for their word that they'll pay you at maturity. You're reasonably sure they'll pay you, because you've got first dibs on whatever's left if they tank. Volatility arbitrage is a bit complicated. I don't know how it works well enough to give you the 5-year-old explanation, but picture normal put and call options for a stock. Traders make forecasts of what they think a security's market price should be at some point in the future, and they can make put or call options. If you think the stock will go down, you can buy a put option. You pay a premium to have the right, but not obligation, to sell the security for a certain price. This limits your downside risk, because you can choose to do nothing if the price increases substantially. Volatility arbitrage works on the same principle, except instead of asset prices you're concerned with relative volatility. You're comparing the implied volatility of an option and and forecast future realized volatility of the underlying asset.
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Oct 26, 2014 04:21
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posh spaz posted:I think you're over-complicating this issue. ETNs are, fundamentally, unsecured senior debts issued by a bank. They are backed only by the credit of the institution. It's really not any different from any other unsecured senior note. You're paying money for their word that they'll pay you at maturity. You're reasonably sure they'll pay you, because you've got first dibs on whatever's left if they tank. This is true, but the redemption/creation process is a complexity that makes them behave very differently. Why else does an ETN not trade at a discount equal to the credit spread on Barclay? Why else does it not tank on a downgrade? Why does it track the index at all? It is the arbitrage mechanism, plain and simple. OP asked how they work... that is how they work. If an ETN was nothing more than a 30 year note, the price would fluctuate drastically from the underlying, probably at a huge discount. But that doesn't happen because the arbitrage mechanism is in place, and AP's come in immediately and correct the price. ESPECIALLY in regards to VXX too where it is expected to decay due to contango. It is basically a 30 year note that promises less than you put in. A VXX ETN cannot simply be a 30 year note that promises zero because it would have no value. It is the value of the ETN structure with its redemption/creation process that makes them even possible to trade for any price at all. Fundamentally, yes they are unsecured senior debt and are not good ideas for investors. 80k fucked around with this message at 04:36 on Oct 26, 2014 |
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Oct 26, 2014 04:32
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| # ? Apr 24, 2024 04:12 |
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You know what though. For the purpose of the OP, it is best to just take posh spaz's answer. That is all one needs to know as to why these products should be avoided. Why they even work at all? If that is your interest, then it is the redemption/creation process with authorized participants that explains how they track the index, without underlying securities. OP, just avoid these things.
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Oct 26, 2014 04:54
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