What Was the VelocityShares Daily 2X VIX Short-Term ETN (TVIX)?
The VelocityShares Daily 2X VIX Short-Term ETN (TVIX) was an exchange-traded note (ETN) that tracked the CBOE Volatility Index (VIX) Short-Term Futures Index, with 200% leverage on daily volatility moves. The TVIX was issued by Credit Suisse Securities (CS) on Nov. 29, 2010, and was ultimately de-listed in June of 2020 along with several other VelocityShares leveraged ETNs.
Despite their delisting, both leveraged exchange-traded products and investments linked to volatility indexes such as the VIX have been and remain popular. Below, we will provide a brief history of the TVIX and why it was delisted, and point out some other leveraged volatility products that are still available to trade.
- The Velocity Shares Daily 2X VIX Short-Term ETN (TVIX) was an exchange-traded note that tracked the S&P 500 VIX Short-Term Futures Index.
- TVIX returned 200% leverage on the volatility moves, making it popular with those who want to bet against the market on a short-term basis.
- TVIX routinely implemented a 10 to 1 stock split when the price fell under certain price thresholds.
- Credit Suisse Securities, the company that issued the ETN, was also its largest institutional holder by a wide margin.
History of the VelocityShares Daily 2X VIX Short-Term ETN (TVIX)
The investment goal of the TVIX was to seek returns that were two times the returns of the S&P 500 VIX Short-Term Futures Index ER for a single day. The VelocityShares® U.S. Volatility Notes were issued by Credit Suisse AG and existed as senior, unsecured obligations of Credit Suisse. TVIX and the other VelocityShares were designed to provide sophisticated investors with daily trading tools to manage volatility risk.
The ETNs net asset value (NAV) was fixed each night and would not change intraday as the level of the applicable underlying index moves. It carried a daily investment fee of 0.70% per annum.
VIX ETNs, like the TVIX leveraged ETN, have been useful for trading short-term moves in the volatility of the S&P 500 index. But because of its structure using futures contracts, the price tends to decay rapidly, leading to several stock splits and a steadily decreasing share price over time. TVIX was not designed to be held for extended periods of time.
The majority of the institutional holders either made markets in the TVIX electronically or utilized it for various high-frequency-trading (HFT) strategy programs. Brokers accounted for the largest position changes, averaging over 25,000 shares per transaction, followed by investment advisors with under 5,000 shares. Individual investors did not greatly trade in TVIX.
You can still find the TVIX prospectus and facts on the VelocityShares site.
ETNs vs. ETFs
Investors should be aware that, unlike an exchange-traded fund (ETF), an ETN does not take actual positions in the underlying tracking instrument. Instead, ETNs are senior unsecured debt obligations of an issuing financial institution that pay no interest and are subject to credit risk.
ETNs do not face tracking errors like ETFs do since there is no buying and selling of the underlying tracking instrument. In fact, ETNs are left strictly to market forces to determine how closely they track the underlying index. While this creates a truly free market pricing mechanism, it can also backfire disastrously when structural or non-correlated anomaly situations arise.
Short-term ETNs are thus riskier than securities that have intermediate or long-term investment objectives, and may not be suitable for investors who plan to hold them for longer than one day. Accordingly, this type of ETN should be purchased only by knowledgeable investors who understand the potential consequences of investing in the applicable underlying index and of seeking daily compounding leveraged long or leveraged inverse investment results, as applicable. Investors should actively and frequently monitor their investment in ETNs, even intra-day.
The 2012 TVIX Disaster
The structure of the TVIX caused a monthly price decay of around 8% to 13%, depending on market volatility, with lower volatility periods seeing price erosion of roughly 80% to 90% annualized. For this reason, Credit Suisse routinely implemented 10 to 1 reverse stock splits when the price fell under certain price thresholds ranging from $5 to $1 per share.
As a result, Credit Suisse temporarily suspended the issuance of new TVIX ETN shares in February of 2012. Due to the limited supply outstanding, the TVIX started to rise as demand lifted premiums, creating a large discrepancy between the net asset value (NAV) and the market price, which had risen as high as 90% above NAV.
The TVIX had several 10 to 1 reverse stock splits since inception, the last of which took place on Dec. 2, 2019.
Retail investors were in for a rude awakening on March 22, 2012, when the TVIX subsequently collapsed 29.3% and proceeded to fall another 29.8% the following day. The TVIX then fell from $14.43 to a low of $7.16, a drop of over 50% in 48 hours.
Even more shocking was that the price collapse was completely unrelated to the underlying moves of the VIX Index. In fact, the VIX Index actually rose higher on that second day. Immediately after the sell-off, Credit Suisse released a statement that it would resume issuing shares again. The suspicious timing of the sell-off and news release led to many class-action lawsuits.
This serves as a cautionary tale for investors to always check the premium between the market price and NAV of an ETN product. Most importantly, the TVIX pricing was completely market-driven without structured pricing mechanisms in place.
2020 TVIX Delisting
In June of 2020, Credit Suisse announced that TVIX along with several other leveraged ETNs in its VelocityShares line would be permanently discontinued and removed from exchanges.
According to the company, the decision was made, "[a]s part of its continuing effort to monitor and manage its suite of exchange-traded notes, Credit Suisse AG has decided to delist the foregoing ETNs with a view to better align its product suite with its broader strategic growth plans."
What TVIX Delisting Means for Investors
Following their delisting, existing shares of TVIX and other impacted ETNs will remain outstanding, though they will no longer trade on any national securities exchange. The ETNs may trade, if at all, however, on an over-the-counter (OTC) basis. The outstanding ETN notes are not due until Dec. 4, 2030. While Credit Suisse has the option to accelerate their maturity, it has not at this point elected to do so.
The immediate result of delisting the ETNs from exchanges removed their primary source of liquidity and existing holders may not have been able to sell their ETNs in the secondary market at all. In addition, suspending further issuances of the ETNs further adversely affects liquidity for any OTC market that may develop following a delisting.
TVIX Stock Pricing and Trading
Currently, you can still track the NAV of the TVIX ETN by inputting its ticker symbol into any online quote service or from your online broker. While the NAV is indicative of the underlying instrument that it tracks, as mentioned above, there is no liquid market for TVIX notes any longer.
Holders of TVIX may be able to arrange an OTC quote and transaction from their broker, depending on that broker's capabilities. In the case that no buyer can be found, and assuming Credit Suisse does not accelerate its redemption, the notes will come due at the end of the year 2030 and investors will receive a cash payment per ETN equal to the applicable redemption value at the time, if there is any. Any investors who paid more for their ETNs than the amount they receive upon maturity will suffer a loss on their investment, which could be significant.
Alternatives to TVIX
Investors or traders looking for exposure to the VIX still have several options available. The most direct route, for those who have access to futures trading, are VIX futures contracts. Most ordinary retail investors either will not have direct access to this market or will not be comfortable trading futures. Luckily, several other ETNs and ETFs exist that track the VIX.
Similar to the TVIX, since the ETNs listed below must roll their futures contracts to rebalance the fund to the later contract, fund managers are forced to sell the futures contracts that are closest to their expiration dates and buy the next dated contracts, which is a process called rolling. Since longer-dated futures contracts are often at higher levels than shorter-dated ones (during normal market conditions), the rolling activity can result in losses (as the ETN is forced to sell the lower-valued contracts and buy the higher-priced contracts), a situation known as contango.
VIX ETFs and ETNs
- iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)
- iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ)
- ProShares VIX Short-Term Futures ETF (VIXY)
Inverse or Leveraged VIX ETFs and ETNs
Pros and Cons of Trading the VIX
Trading the VIX can be attractive to those wanting to place bets on overall market volatility, but investors considering these ETFs and ETNs should realize that they are not great proxies for the performance of the spot VIX. All of these ETNs and ETFs can be expected to perform very differently from the VIX itself. Some may rise or fall in tandem with VIX, but the rate at which they move and the lag time can make pinpointing entry and exit points a challenge even for seasoned traders. Moreover, the inherent contango decay makes them a losing bet for any long-term holder.
Market volatility investments like these are therefore best suited for investors with a short-time horizon who can closely watch their positions and move quickly if the market turns against them. In extreme market conditions, when volatility spikes, short-term VIX futures contracts can trade at higher levels compared to longer-term ones—a situation called backwardation, which can cause irregularities in ETN pricing.
If investors really want to place bets on equity market volatility or use them as hedges, the VIX-related ETF and ETN products are acceptable but highly-flawed instruments. However, they certainly have a strong convenience aspect to them, as they trade like any other stock on an exchange. Note that one way to get access to volatility trading is through listed options on the S&P 500 index. Approved traders with options trading access can buy at-the-money straddles, for instance, to make a long bet on stock volatility.
ETFs and ETNs have shares that trade throughout the day like a stock, making them accessible and cost-effective.
Short-term and day traders can use them to speculate on or hedge against daily volatility moves.
Inverse or leveraged products provide versatility.
Contango in the ETN construction leads to price decay over time.
Short-term spikes in volatility can cause prices to trade out of whack with NAV.
Issuers may de-list products, causing losses for holders who cannot sell their shares.
Not suitable for retail or buy-and-hold investors.
Was TVIX a Good Investment?
No, TVIX was never intended for investors to buy-and-hold. Rather, it was meant as a very short-term volatility instrument. Because TVIX was de-listed, there is no longer an active market for the ETN and holders are unlikely to recoup their investment.
What Kind of Stock Was TVIX?
TVIX shares were constructed as an exchange-traded note, or ETN. ETNs are a type of unsecured debt security that tracks an underlying index of securities through the use of derivatives such as futures contracts.
How Was TVIX Price Calculated?
TVIX's net asset value (NAV) was calculated on a daily basis. But, because ETNs are unsecured notes and do not directly invest in the underlying securities, their prices are driven purely by supply and demand in the market.
Could You Short TVIX?
ETNs trade like shares of a stock on listed exchanges. As a result, they technically could be sold short—subject to a broker's restrictions and ability to locate and borrow the shares for shorting. For practical purposes, ETNs like TVIX that experience price decay over time and are not held long-term will be extremely hard to borrow, and therefore shorting would not be possible. Note, however, that there are several inverse VIX products that rise in value when volatility falls.
Why Was TVIX Delisted?
Credit Suisse, the issuer of TVIX and other VelocityShares ETNs decided in June 2020 to delist it along with several other products, according to its website, in an effort to better align its offerings with the company's strategic vision.
The Bottom Line
The TVIX was a 2x leveraged ETN that sought to return twice the daily change in the CBOE volatility index (the VIX). Like many other VIX ETNs and ETFs, it naturally experiences price decay over time due to the way it was constructed using VIX futures contracts that need to be rolled regularly.
Moreover, the use of futures and not a direct holding of the spot VIX means that these unsecured notes could see harmful price anomalies in the market that deviate radically from the net asset value (NAV). As a result, TVIX and similar products were not and are not intended for long-term investors and are mainly targeting sophisticated day traders. TVIX was ultimately delisted in 2020, so existing holders of the ETN notes might only be able to rid themselves of shares over-the-counter.