UBS on September 8 rolled out a dozen ETNs targeting long and short (inverse) exposure to VIX futures at six monthly maturity intervals. The new exchange-traded notes are anticipated to mature in 30 years. The inverse versions include an “Event Risk Weekly Hedge Cost” that saddles investors with 4% in additional annual fees on top of the 1.35% tracking fee, or 5.35% total annual fees. The long versions have more modest annual fees of 0.85%.
The six new long VIX futures ETNs listed below share a common summary page, fact sheet (pdf), and prospectus (pdf):
- UBS ETRACS 1-Month S&P 500 VIX Futures ETN (VXAA)
- UBS ETRACS 2-Month S&P 500 VIX Futures ETN (VXBB)
- UBS ETRACS 3-Month S&P 500 VIX Futures ETN (VXCC)
- UBS ETRACS 4-Month S&P 500 VIX Futures ETN (VXDD)
- UBS ETRACS 5-Month S&P 500 VIX Futures ETN (VXEE)
- UBS ETRACS 6-Month S&P 500 VIX Futures ETN (VXFF)
The six new short (inverse) VIX futures ETNs listed below share a common summary page, fact sheet (pdf), and prospectus (pdf):
- UBS ETRACS Daily Short 1-Month S&P 500 VIX Futures ETN (AAVX)
- UBS ETRACS Daily Short 2-Month S&P 500 VIX Futures ETN (BBVX)
- UBS ETRACS Daily Short 3-Month S&P 500 VIX Futures ETN (CCVX)
- UBS ETRACS Daily Short 4-Month S&P 500 VIX Futures ETN (DDVX)
- UBS ETRACS Daily Short 5-Month S&P 500 VIX Futures ETN (EEVX)
- UBS ETRACS Daily Short 6-Month S&P 500 VIX Futures ETN (FFVX)
The 2-month, 3-month, 4-month, and 6-month indexes are newly created (August 2011) and have no prior history. All contracts are rolled on a daily basis to maintain the specified constant maturities.
The inverse versions will bear an Event Risk Weekly Hedge Cost of 7.7 basis points (0.077%) per week, accrued daily. This works out to about 4% annually and “represents the general cost to UBS to hedge overnight extreme market movements.”
“Event Risk” is not defined in the prospectus, nor is the benefit of the hedge described anywhere (and there is not a Statement of Additional Information mentioned). The 4% annual drag (5.35% total fee) over 30 years implies that UBS hopes to collect fees in excess of the original principal amount. However, the high fee structure practically guarantees that an early termination event will occur prior to the 2041 maturity date.
In my opinion, any company (or security) that charges a 4% annual fee should be required to describe what it is doing to earn that fee and how the fee benefits investors. This really makes me wonder if anyone at the SEC actually looked at these products.
To the credit of UBS, they do include the following warnings in multiple places throughout the literature using an all-cap typeface:
EACH OF THE ETNs IS DESIGNED FOR TRADERS. IF YOU DO NOT UNDERSTAND THE EFFECTS OF DAILY RESETS, THE NEGATIVE CARRY ASSOCIATED WITH VIX FUTURES AND THE NEGATIVE EFFECTS OF THE EVENT RISK WEEKLY HEDGE COST, THEN YOU SHOULD NOT INVEST IN THE ETNs
DUE TO CERTAIN CHARACTERISTICS OF THE ETNs, INCLUDING THE NEGATIVE EFFECTS OF THE EVENT RISK WEEKLY HEDGE COST, WHICH WILL BE SIGNIFICANT OVER LONGER PERIODS OF TIME, THE ETNS ARE NOT INTENDED TO BE A “BUY AND HOLD” INVESTMENT.
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.