Source, Nomura add euro share class to tactical volatility ETF

Jan 6th, 2012 | By | Category: Alternatives / Multi-Asset

Source, a specialist provider of exchange traded products, and Nomura, a global investment bank, have announced that the Nomura Voltage Mid-Term Source ETF has been listed in EUR on Xetra.

Source and Nomura add euro share class to tactical volatility ETF

With the eurozone crisis far from resolved, gridlock on Capitol Hill, sabre-rattling in the Middle East and instability on the Korean peninsular, investors should be alert to tail-risks.

The EUR listing accompanies the existing USD currency class which launched on the London Stock Exchange back in April last year.

Volatility-linked exchange traded products, such as this, are designed, in part, to meet investors’ demands for portfolio protection during times of severe market disruption.

The iPath S&P 500 VIX futures ETNs from Barclays Capital were an early leader in this field and currently have around $1bn invested in them.

Most volatility-based ETPs track the VIX index, which calculates the implied volatility in S&P 500 index option prices. The VIX is commonly known on Wall Street as the “fear gauge” as it typically rises when investors become nervous about potential stock-market falls.

The VIX spiked sharply during the global financial crisis, rising to record levels in the wake of the collapse of Lehman Brothers.

While volatility has edged up over the past year on fear of a euro-collapse, it remains well below the peak seen in November 2008. But with the eurozone debt crisis far from resolved, gridlock on Capitol Hill, sabre-rattling in the Middle East and instability on the Korean peninsular, investors should be alert to the threat of further unexpected crises – known by industry analysts as tail-risk events.

However, one major issue with VIX-linked products is that investors become exposed to the problem of contango, where each new monthly futures contract costs more than the expiring one. This can lead to returns deviating from those represented by the performance of the index.

The Nomura Voltage Mid-Term Source ETF attempts to minimise the return drag caused by contango by targeting the middle part of the VIX futures curve, which is less upward sloping. The ETF will also invest in three-month US Treasuries as a way of reducing the effect of contango during times when volatility is low.

Ted Hood, CEO of Source, said, “Volatility continues to be an attractive asset class for many European investors. The new EUR listing will facilitate trading for EUR-denominated investors and provide access to Nomura’s innovative Voltage strategy.

“Volatility is a new asset class for many investors and the combination of the cost of rolling futures and the VIX index’s tendency revert to the mean, have posed challenges for long-term investors. The Voltage strategy provides an innovative approach, which will help address these concerns.”

The allocation to the Voltage Index can be between 0% and 100% and depends on the volatility of that index – the higher the relative volatility, the higher the allocation. This allows for a reactive tactical model, which rebalances on a daily basis unlike vanilla options or most OTC volatility instruments.

Commenting at the initial LSE launch, Mohamed Yangui, Managing Director and Head of Equity Structuring at Nomura, said, “The tactical allocation of Voltage means that it is an investment that can be considered on a longer-term basis than the typical systematically long volatility funds available on the market today.”

Since inception in April 2011, the ETF has enjoyed decent inflows and currently stands at $166m.

 Fund name  Nomura Voltage Mid-Term Source ETF
 Management fee  0.30% p.a.
 Benchmark  Nomura Voltage Strategy Mid‐Term 30‐day USD TR Index
 Benchmark (ticker)  NMEDVMU3
 Fund currency  USD
 Listing  London Stock Exchange  Deutsche Börse (Xetra)
 ISIN  IE00B3LK4075  DE000A1JQQZ6
 Trading currency  USD  EUR
 Bloomberg (ticker)  VOLT LN  NVLT GR
 Reuters (ticker)  VOLT.L  NVLT.DE
 Domicile  Ireland

 

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