VQT

ETF WeeklyAnother Volatility ETN Launches, With More on the Way
A New Zealand ETF starts trading, and the best- and worst-performing ETFs from last week.PrintCommentRecommend (-)By Robert Gold*****orough | 09-06-10 | 06:00 AM | E-mail Article
On Wednesday, Sept. 1, Barclays Capital launched Barclays ETN+ S&P VEQTOR ETN (VQT


Sponsored by:
VQT) , an exchange-traded note that provides investors with exposure to broad equity markets with a built-in volatility hedge to protect them against down markets. This ETN will track the S&P 500 Dynamic VEQTOR Index, which invests in broad equity markets with a dynamically rebalanced volatility allocation that is the result of the use of short-term VIX futures. Calculated and disseminated by the Chicago Board Options Exchange and known by many as the "fear index" or the "fear gauge," VIX reflects near-term market volatility by measuring the implied volatility embedded in the prices of S&P 500 index options. (Standard & Poor's derived the "VEQTOR" name from Volatility Equity Target Return.)


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Because the S&P 500 Dynamic VEQTOR Index's equity component follows the S&P 500 Total Return Index and its volatility component is tied to the S&P 500 VIX Short-Term Futures Index, VQT allows investors to capitalize on the negative correlation between equity-market volatility and equity-market performance. The ETN's structure is as follows: When equity-market volatility is low (no volatility trend and close to no realized volatility), the equity component of the ETN can approach 100%, reaching a maximum of 97.5% of VQT. But when there is equity-market volatility with high realized volatility and an implied uptrend in volatility, VQT's equity allocation will drop and the volatility allocation will rise. VQT also employs a "stop-loss" mechanism that shifts the entire value of the ETN--that is, both the equity and the volatility allocations--to 100% cash if there is a loss greater than or equal to 2% over a period of any five consecutive business days. Once the trailing index returns are greater than negative 2% for a period of five consecutive business days, VQT will reallocate its assets to the proper equity and volatility weightings.


The S&P 500 Dynamic VEQTOR Index rebalances daily, and VQT will charge an annual expense ratio of 0.95%. Although the product may seem complicated at first blush, it offers investors the ability to exceed the returns of the SPDR S&P 500 (SPY


Sponsored by:
SPY) in down markets, given the high negative correlation among the benchmark's equity and volatility components. Similarly, the product should underperform the SPDR in up markets because of lower volatility. However, given the equity market's weak performance thus far in 2010, this ETN should have some appeal for investors hungry for returns amid economic and market uncertainty.


We should remind investors that, as an exchange-traded note, VQT is an unsecured debt instrument that does not guarantee any return of principal at maturity or upon redemption because it carries with it the risk of default of the issuing bank. While this risk is not huge given the capitalization of Barclays Capital's parent, Barclays Bank PLC, investors need to mindful of this risk, particularly given that three ETNs issued by Lehman Brothers went belly-up when that bank failed, leaving ETN investors in bankruptcy court, standing in line behind the bank's secured creditors. In addition, investors need to understand that this ETN tracks futures on the VIX, and not the VIX itself, meaning investor returns on what is a rolling futures portfolio will be markedly different from the returns on the VIX itself (which investors can't invest in, anyway).


VQT is the latest in a line of volatility-related exchange-traded products that recently have begun trading or been registered, reflecting a clear desire by fund sponsors to appeal to investors who have been whipsawed by the market volatility of the last few years. Other products on the market include two large VIX ETNs that are long volatility and also are backed by Barclays: the iPath S&P 500 VIX Short-Term Futures ETN (VXX


Sponsored by:
VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ


Sponsored by:
VXZ) , both of which began trading in January 2009 and both of which charge 0.89%. And, in July, Barclays launched the Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN (XXV


Sponsored by:
XXV) , which is the first-ever exchange-traded product that is inversely linked to a volatility index. XXV also charges 0.89%.


In addition, even more volatility-linked products are in the pipeline. Direxion has filed to launch the Direxion S&P 500 Dynamic VEQTOR Shares ETF (no ticker available yet), which would be tied to same index as VQT and therefore be a similar product. And Jefferies Asset Management, known for its commodity ETFs, has filed to offer the Jefferies S&P 500 VIX Short-Term Futures ETF VIXX, with a proposed management fee of 0.49% per year.


Launches
Last week, iShares launched the single-country iShares MSCI New Zealand Investable Market Index (ENZL


Sponsored by:
ENZL) . The New Zealand capital market is very small; the total market cap of ENZL's underlying MSCI index is around $23 billion. The index includes 23 companies, and the top two holdings--building-materials firm Fletcher Building and Telecom Corp of New Zealand--account for a significant 20% and 16% of the portfolio, respectively. The expense ratio for this fund is 0.55%.


Highlights from Morningstar.com
In an article this week on Morningstar.com, Michael Rawson summarized the four principal equity index providers and offered ways to gain access to them through ETFs.


Schwab Acquires ETF Manager
Discount broker Charles Schwab (SCHW


Sponsored by:
SCHW) announced last week that it would pay $150 million in cash and stock to buy Boston-based Windward Investment Management, an investment-advisory firm that manages $3.9 billion in three broadly diversified portfolios that primarily consist of ETFs. The move will significantly bolster Schwab's foray into the ETF market. The firm entered the ETF market in November and now manages $1.4 billion in eight proprietary ETFs. Schwab launched three more ETFs in August. The Windward deal is expected to close during the fourth quarter.


ETF Performance Last Week
Best-Performing: The list of best-performing ETFs last week was dominated by metals funds, particularly those holding copper. Prices of copper, which is used widely in construction, rose last week after a report of higher home-sales data in July.


Other high-performing ETFs last week included solar energy ETFs (which benefited from recent upgrades in the space and an indication that demand in 2011 will be stronger), an ETF holding equities in Australia (where recently released manufacturing numbers were stronger than expected), and an ETF holding equities in Vietnam (where there were reports of faster economic growth this year than previously expected).

Category1-Wk NAV ReturnYTD NAV Return3-Mo Avg Daily Vol (k)Global X Copper Miners ETF (COPX


Sponsored by:
COPX) Materials9.9N/A7.8First Trust ISE Global Cop In (CU


Sponsored by:
CU) Materials9.5N/A4.3SPDR S&P Metals & Mining (XME


Sponsored by:
XME) Materials9.2-1.13,782.2Market Vectors Solar Energy (KWT


Sponsored by:
KWT) Energy9.2-24.318.0Claymore/MAC Gl Solar En (TAN


Sponsored by:
TAN) Energy9.0-24.5457.6IQ Australia Small Cap ETF (KROO


Sponsored by:
KROO) Asia ex-Jpn9.0N/A5.7Market Vectors Vietnam ETF (VNM


Sponsored by:
VNM) Emg-Mkts Eq8.6-3.363.1Market Vectors Steel ETF (SLX


Sponsored by:
SLX) Materials8.6-2.1269.8PowerShares Dyn Leis & Ent (PEJ


Sponsored by:
PEJ) Cons Disc8.415.251.2PowerShares S&P SmCap Mat (XLBS


Sponsored by:
XLBS) Materials8.2N/A2.5Data through 09/02/10.

Worst-Performing: The biggest losers last week were market-volatility-linked ETFs, which declined as markets rose, and long-duration Treasury ETFs, which slid amid market concerns that interest rates will rise. A rise in interest rates would hurt long-duration bond prices as yields rise.

Category1-Wk NAV ReturnYTD NAV Return3-Mo Avg Daily Vol (k)iPath S&P 500 VIX ST Fut (VXX


Sponsored by:
VXX) Alt-Volatility-12.8-40.922,282.0PIMCO 25+Zero Cpn U.S. Tr (ZROZ


Sponsored by:
ZROZ) Long Gov-5.828.920.3Vanguard Extended Dur Trs (EDV


Sponsored by:
EDV) Long Gov-5.028.141.9iPath S&P 500 VIX MT Fut (VXZ


Sponsored by:
VXZ) Alt-Volatility-3.816.5391.3iShares Barclays 20+ Tr Bd (TLT


Sponsored by:
TLT) Long Gov-3.119.46,729.9SPDR Barclays Cap Long Crdt (LWC


Sponsored by:
LWC) Long Invst Gr-3.011.36.8iPath US Tr Long Bd Bull (DLBL


Sponsored by:
DLBL) Long Gov-2.8N/AN/ASPDR Barclays Cap LT Tr (TLO


Sponsored by:
TLO) Long Gov-2.717.512.3Vanguard Long-Term Bd In (BLV


Sponsored by:
BLV) Long Invst Gr-2.615.179.6iShares 10+ Yr Credit Bd (CLY


Sponsored by:
CLY)