Barclays Capital, the investment banking division of London-based Barclays Bank PLC, launched a new exchange-traded note based on the S&P 500 Dynamic Veqtor Index, the fourth volatility-linked exchange-traded product for the global banking giant.

The Barclays ETN+ S&P Veqtor Exchange Traded Note (NYSEArca: VQT) began trading Wednesday morning. The note carries an annual expense ratio of 0.95 percent, or 95 basis points. One hundred basis points is equal to 1 percentage point.

The new note tracks the S&P 500 Veqtor Index, which combines broad equity market exposure with a built-in volatility hedge by allocating assets among the S&P 500 Index, the S&P 500 Short-Term VIX Futures Index and cash. VIX, a product of the Chicago Board Options Exchange, reflects the prices of S&P 500 futures options and is a benchmark for measuring near-term volatility.

VQT is the latest in a series of exchange-traded product launches and registrations from a handful of fund sponsors to incorporate either a straight volatility play or a volatility hedge. Volatility-linked products represent a small but growing segment of the exchange-traded product universe this summer as the Dow Jones industrial average has bounced off its year-to-date lows but struggled to remain above the 10,000 mark amid anxiety about the possibility of a double-dip recession.

More Volatility-Linked Offerings On The Horizon

In July, Barclays launched the first-ever exchange-traded note inversely linked to a volatility index, The Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN (NYSEArca: XXV). XXV has gathered $20.2 million in assets since its inception.

The other two VIX ETNs backed by Barclays are the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ). Both funds launched in January 2009. To date, VXX has amassed nearly $2 billion in assets, while VXZ has $757.9 million under management.

Barclays has plans for even more volatility-linked product launches, according to Philippe El-Asmar, head of investor solutions at Barclays Capital.

“In the U.S., we have iterations of medium- and short-term products we’re working on right now,” said El-Asmar in a telephone interview. In addition, Barclays has cross-listed both VXX and VXZ in Europe.

ETNs versus ETFs

Like the rest of the Barclays ETN family, VQT represents an unsecured senior debt obligation of Barclays Bank PLC and is subject to Barclays’ credit risks. In the event of a bankruptcy, Barclays’ ETN holders would wind up in line behind the bank’s secured creditors. An ETF, by contrast, represents a secured interest in the underlying assets of the fund.

Other fund sponsors with volatility-based products in registration are Bank of America, Stamford, Conn.-based Jefferies Asset Management, and Newton, Mass.-based Direxion, which has filed for permission to launch a Veqtor-linked ETF similar to Barclays’ VQT ETN.

“In terms of positive attributes, an ETN by legal obligation must be an exact replication of the underlying benchmark index, while an ETF’s exact replication is an investment goal,” said El-Asmar, adding, “In an ETF, there is a trade-off between tracking error and credit risk.”