iPath To Redeem Inverse VIX ETN 'IVO'
September 12, 2011
iPath, the exchange-traded note unit of U.K.-based Barclays Bank Plc, said it will automatically redeem its iPath Inverse January 2021 S&P 500 VIX Short-Term Futures Exchange-Traded Note(NYSEArca: IVO) because the notes fell below the $10 per share automatic redemption price.
The ETN’s price fell below $10 at around 2:11 p.m., according to information posted on Google Finance. The company said in a press release that on Sept. 19, note holders will receive IVO’s closing indicative value on Sept. 12. The notes ended Monday’s session at $10.50 a share, down 12.1 percent, or $1.45, according to data compiled by IndexUniverse.
The planned redemption marks the second time in as many months that iPath has had to redeem one of its VIX-related ETNs. Earlier this summer, iPath was forced to automatically redeem its iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VZZ) because the ETN had tumbled below its automatic redemption threshold of $10 a share.
Days later, the ETN company subsequently issued (NYSEArca: VZZB), a virtually identical security, which we wrote about in a piece titled "iPath Serves Up A 'Plan B' To VZZ."
It wasn’t clear if “IVO” would also be replaced with a similar new ETN. IVO had about $27.5 million in assets as of Friday, Sept. 9, according to data compiled by IndexUniverse.
Officials at the company didn’t elaborate on what was revealed in the press release.
Not All VIX ETNs Are Created Equal
VIX-related ETNs may be profitable insurancelike products that rise in value when markets are plunging, but they often have exceedingly bad long-term returns. Indeed, their sponsors are quick to make clear that they aren’t designed as buy-and-hold products.
The redemption provisions are one way of dealing with such erosions in value. However, only iPath’s inverse and leveraged ETNs have automatic redemption provisions.
Conversely, iPath ETNs designed with single-exposure bullish return profiles don’t have such provisions.
The iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) is such a single-exposure note without a redemption provision. It’s the biggest VIX-related ETN, with about $1.07 billion in assets as of last Friday.
Both the New York Stock Exchange and Nasdaq halted trading in the ETN at 3:13 p.m., the two exchanges said in separate emailed messages. The Big Board and Nasdaq both said trading in IVO resumed at 4:35 p.m. Eastern time.
The company is posting information about the IVO redemption on its website.
ETNs, unlike ETFs, don't hold any assets. They are fixed-income obligations that promise the return of a given index, minus expenses. Should the issuing bank go bankrupt, note holders would have no recourse. Barclays is the bank behind all iPath ETNs.
Paul and Ugo discuss the rumors surrounding the SEC's new approach to passive ETFs and whether investors have learned any lessons from the recent moves in gold.See All