VelocityShares rolls out pair of volatility strategy ETFs

Jun 28th, 2013 | By | Category: Alternatives / Multi-Asset

VelocityShares, a developer of alternative exchange-traded products perhaps best known for its occasionally notorious VIX ETNs, has rolled out two new innovative exchange-traded funds (ETFs) on the NYSE Arca.

VelocityShares rolls out pair of volatility strategy ETFs

VelocityShares has rolled out pair of innovative volatility strategy ETFs on the NYSE Arca.

The funds are linked to proprietary in-house indices and provide exposure to a long/short volatility strategy combined with a large-cap US equity allocation.

They are the VelocityShares Volatility Hedged Large Cap ETF (SPXH), linked to the VelocityShares Volatility Hedged Large Cap Index, and the VelocityShares Tail Risk Hedged Large Cap ETF (TRSK), linked to the VelocityShares Tail Risk Hedged Large Cap Index.

The ETFs combine an 85% exposure to a US large-cap equity portfolio (as represented by the S&P 500 Index) with a 15% exposure to a volatility strategy, rebalanced every month.

Both volatility strategies are designed to provide long/short exposure to VIX futures and potentially benefit from the interaction between the dynamics of the VIX futures curve and the convexity generated by using daily resetting instruments. However, they differ slightly. TRSK utilises a volatility strategy which tries to hedge tail risk events in the S&P 500, at a potentially higher cost during normal market conditions, by targeting a slightly long volatility bias, while SPXH tries to hedge large volatility events but retain upside potential during normal market conditions, by targeting a neutral volatility bias.

Both strategies utilise a purely systematic, signals-free approach in an attempt to create effective long and short volatility positions with desirable cost/benefit characteristics.

To achieve the equity exposure, the funds invest in a trio of S&P 500 ETFs offered by iShares, SPDR and Vanguard, while to gain the volatility exposures, the funds enter into total return swap agreements based on the S&P 500 VIX Short-Term Futures Index.

Commenting on the launch, Nick Cherney, Chief Investment Officer and co-founder of VelocityShares, said: “Volatility ETPs have proliferated in the last four years, but until now, investors have not had a sophisticated product which would enable them to implement a strategic volatility allocation in one package. These VelocityShares ETFs are intended to provide a truly institutional quality solution to a vexing problem: how to use volatility to improve portfolio quality.”

Both funds come with an annual fee of 0.71%.

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