Citigroup Belly-Flops Into ETP Sponsor Pool

November 19, 2010 by  
Filed under Commentary, ETF IPOs (New ETFs), ETNs, Volatility Products

Citigroup (C) entered the pool of exchange traded product (ETP) sponsors on November 15, 2010 with the introduction of C-Tracks Citi Volatility Index Total Return ETN (CVOL).  One would think that Citi would pull out all the stops in an attempt to make a favorable first impression in a competitive market.  They are making a splash, but it is not a favorable one.

Some of the most glaring shortcomings include:

  • Citi has not created a website for C-Tracks except for their Hong Kong listed C-Tracks products.
  • Citi did not issue a press release that could be located, and a search on the Citigroup.com website returns with “Your search for ‘c-tracks’ did not match any documents”.
  • The only way to get information is to search the SEC’s Edgar site, assuming you know the file number, where you might be able to find the Final Pricing Sheet (also known as “Issuer Free Writing Prospectus”).
  • The market maker appears to be non-existent with CVOL having a bid/ask spread of more than 6% at various times on Tuesday (11/16) and one trade going through at 8.7% above the NAV.

CVOL intends to track the Citi Volatility Index Total Return minus the 1.15% annual investor fee.  It is a new index intended as “a measure of directional exposure to the implied volatility of large-cap U.S. stocks”.  The pricing sheet goes on to explain that the methodology “is designed to produce returns that are correlated to the CBOE Volatility Index (the “VIX Index”), which is another measure of implied volatility of large-cap U.S. stocks.”

Reading the above description might lead one to believe that CVOL would therefore track the VIX, overcoming investor’s anguish with the volatility-based ETNs from Barclays iPath that track VIX futures.  However, buried in some of the small print are hints that the new Citi Volatility index is based on VIX futures.

CVOL’s Issuer Free Writing Prospectus does not say whether the index is based on short-term VIX futures like iPath S&P 500 VIX Short-Term Futures ETN (VXX) or mid-term VIX futures like iPath S&P 500 VIX Mid-Term Futures ETN (VXZ).

Fot that information, deeper digging is required.  The Preliminary Pricing Supplement of November 1 indicates the underlying index is actually composed of third- and fourth-month futures contracts on the VIX Index multiplied by a factor and a variable short position in the S&P 500 Total Return Index.

My advice is to stay away from CVOL until Citi gets its act together.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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