Recently the rumor mill has been going wild with speculation about the introduction of SVIX and UVIX.
According to SEC filings (latest filing date: January 6, 2022), these volatility ETFs tracking VIX futures could fill the void left behind by TVIX and XIV:
- SVIX tracks -1x daily returns of the one-month blend of VIX futures. SVIX would be a perfect copy of delisted XIV and still available SVXY prior to its deleveraging to -0.5x effective February 28, 2018.
- UVIX tracks 2x daily returns of the one-month blend of VIX futures, making it the legitimate successor of TVIX (delisted effective July 12, 2020).
Read this article to learn more about XIV and TVIX, two of the previously most widely traded volatility ETFs and ETNs.
Timeline & Inception Date
Beyond the SEC filings, no official announcement has yet been made. However, there have been rumors that both SVIX and UVXY will start trading at the end of March or at the beginning of April.
Issuer
According to the filings with the SEC, the potential issuer is Volatility Shares LLC, a startup company. Its website currently does not provide many details beyond the objective of creating Exchange Traded Funds tracking custom volatility indices.
According to a Bloomberg report from 2020 and the SEC filings, the founders of Volatility Shares include Stuart Barton and Justing Young. Stuart Barton is a partner at financial adviser Invest In Vol. Justing Young brings relevant expertise from working at ETF providers.
Interesting Features
1. Calculation of Underlying Index
Widely traded volatility ETF and ETNs, such as VXX and UVXY, track volatility indices provided by Dow Jones.
Originally, these indices assumed daily rebalancing of VIX futures at the 4:15 pm close of the futures exchange. It is believed that the decoupling of stock market close and futures close contributed to the events popularly known as Volmageddon.
Therefore, the CBOE (exchange where VIX futures are traded) changed the settlement calculation in January 2021. Now, VIX futures settlement is at 4:00 pm in line with equity markets. Additionally, a volume-weighted average of the trades over the last 30 seconds is used for calculating the settlement price.
Ending the trading sessions simultaneously and considering a 30-second period are improvements over the previous approach. However, the rebalancing in the final seconds of the trading day is still a major Achilles’ heel.
The underlying indices for SVIX and UVIX take an innovative approach.
- They do not depend on a single price. The settlement price calculated by CBOE is not an input.
- Daily returns are calculated based on VIX futures trading data for both first and second month contracts over the last 15 minutes of the trading session. In simple words, the last minute has the same weight as the first.
As a result, the underlying indices for SVIX and UVIX do not depend on a small number of trades just before market close. This should make them more robust and less prone to manipulation.
Do these new indices deliver the same returns as XIV and TVIX?
As for TVIX vs UVIX, the difference in annual returns should be small.
Very different story for XIV vs SVIX! While XIV took a 96% loss on February 5, 2018, SVIX would have fared much better.
2. Taxation
Like many other VIX futures exchange traded products, the funds will distribute a Schedule K-1.
It is painful to work through these documents, reportedly even for tax professionals! But then, isn’t it a small price for huge profits from volatility ETFs? 😉😉😉
Odds of Success
Assuming the SEC approves these volatility tracking ETFs as submitted, both SVIX and UVIX have the potential for success.
SVIX will provide significantly larger returns than SVXY in non-volatile periods. Needless to say that it will take a beating during corrections and bear markets. Its underlying index, however, should make it more resilient to after-hours volatility events as experienced on February 5, 2018 (Volmageddon).
Given the larger leverage factor, UVIX most certainly will push UVXY aside and become the new favorite of volatility junkies.