REX Shares, the fairly new entrant in the exchange-traded funds space promoted by industry veteran Greg King, recently launched two products that focus on volatility of the broad-based large-cap US equity market.
The REX VolMAXX Long Weekly Futures Strategies ETF (VMAX) aims to provide exposure to the implied volatility of the broader large-cap US equities by investing in VIX futures-contracts with less than 30-day to expiry.
The actively-managed VMAX offers exposure to short-term futures contracts on the CBOE Volatility Index or SPX VIX, also known as the fear index. VIX is a reference for implied volatility of options on the S&P 500 with an expiry of 30 days and is calculated from a wide range of call and puts. An index value of 20 indicates the implied volatility of 30-day options on the S&P 500 is estimated as 20 percent.
A plain-vanilla futures or options-contract on the S&P 500 is a wager on the anticipated movement of both the future level and volatility of the S&P 500 index. By contrast, a trade involving futures or options contract on the VIX is a wager on volatility only.
However, CBOE introduced weekly expirations for VIX futures in July 2015, which means the short maturity futures contract would display a higher degree of beta and correlation to the true daily price movement of the VIX index.
By going long on weekly maturity VIX futures-contracts and targeting a weighted average time-to-expiration of less than one month, VMAX offers protection against a sharp drop in equities and reflect the movement of the VIX index more accurately by minimizing tracking error.
VMAX can also invest in other ETFs that offer exposure to VIX futures while maintaining substantial cash positions.
The REX VolMAXX Inverse Weekly Futures Strategies ETF (VMIN), on the other hand, seeks to profit if the SPX VIX falls (or equity markets jump, in other words) and aims to achieve its objective by going short on weekly-maturity VIX futures contract.
Like its cousin, VMIN can also invest in other exchange-traded products/ETFs that have exposure in the SPX VIX.
Additionally, both VMAX and VMIN seek to retain daily exposure in VIX futures contracts that is approximately equal to 100 percent of fund assets.
One of the drawbacks of short-term volatility funds is that historically they have shown huge decay from contango relative to medium term (five-month average) ETPs. The active management of the new funds may set them apart from other 1-month maturity products with respect to roll costs.
VMAX charges 1.25 percent every year while VMIN charges 1.45 percent annually.
Disclosure: No holdings
Special Note: Starting next Saturday, I will feature “ETFs on the Cutline,” which I used to post on Mondays. Many readers have requested this move to the weekend, so that they would have a chance to work with the data and prepare any orders for Monday’s session.
The current “New ETFs on the Block” section will be shelved for the time being.Contact Ulli