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TVIX Blowup Shows What ETNs Are Capable of

Mar 23, 2012
Ron DeLegge

The swift collapse of a VIX ETN shows what happens when a toxic combination of falling stock market volatlity and lack of support by a product issuer mix.

The historic collapse of a leveraged ETN linked to the VIX index has captured the fancy of adults and schoolchildren everywhere. 


The VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX) lost around 60% in value over the past 2 days, wiping out traders who were making bullish bets on the VIX. “Another one bites the dust,” as the rock bad Queen would say.

This latest episode brings back bad memories for people that invested in Lehman Brothers ETNs, known as “Opta ETNs” which became worthless when the company declared bankruptcy in 2008.

The VIX is a forward looking tool that measures the expected future volatility of the S&P 500 stock index (NYSEArca: SPY) for the next 30 days. The VIX is quoted in percentage points and it was first introduced in a research paper by Professor Robert E. Whaley at Duke University.

Here's what went wrong with TVIX:

1) Declining stock market volatility has taken the VIX index to 5-year lows, which has crushed ETN products like TVIX that are long the VIX with 2x daily leverage.

2) The issuer of TVIX, Credit Suisse, stopped creation of the notes on February 21st - causing further instability in the share price of TVIX. What Credit Suisse did is akin to a captain abandoning ship and leaving the passengers to fend for themselves.

3) Wall Street’s mad scientists (product developers) have been pushing through new ETNs at a rapid pace, because the timetable to market is much shorter compared to traditional ETFs. This has led to an overpopulation of exotic investment strategies wrapped in even more exotic financial burritos.

4) The SEC (once again) comes up short in protecting investors. Could the TVIX ETN blowup have been prevented? Even the ever inept Inspector Clouseau would’ve seen red flags.

I have been warning investors and traders at ETFguide.com and on my weekly radio program to absolutely avoid ALL ETNs.

On September 13, 2011, I wrote "ETN Market Primed for Disaster." The article was published at ETFguide.com and Yahoo Finance.

That piece was followed up by another controversial article I wrote on November 30, 2011 titled “Are you ready for the Great ETN Meltdown?” Then again, on February 13, 2012, I followed up with “Credit exposure for ETNs not going away.”

In each case, both myself and ETFguide was ridiculed for its forceful recommendations against ETNs. While industry types within the ETP market were being bribed by the ETN industry with advertising money, we were warning people. But that’s not all.  

In the December 2011 edition of the ETF Profit Strategy Newsletter, we asked “Which ETNs Will Blow Up First?” In this research piece, I provided a list of the top 15 ETNs by assets and 15 alternatives. We gave our subscribers three-months of advanced warning, which shows that fiercely independent research and going against the Wall Street consensus is a winning formula. (Incidentally, TVIX was one of the very ETNs we advised against!) 

Today, there’s roughly $17 billion parked in U.S. listed ETNs, which is almost double the amount that was invested in ETNs in 2010. People have piled into ETNs linked to master-limited partnerships (NYSEArca: AMJ), Indian stocks (NYSEArca: INP), and gold (NYSEArca: DGP).

After the sudden meltdown of major financial institutions during the 2008-09 financial crisis, one would logically think that people learned about the danger of credit backed products, but apparently not.

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