VXXB is transparent about how the ETN is priced, just first 2 futures contracts with a 30 day weighted maturity. Say I wanted to be short VXXB, and assume borrowing/shorting is no problem (as it currently is at IB) Are there any inherent advantages or disadvantages between shorting the ETN outright vs constructing the position using short positions in the first 2 VX futures contracts? Obviously the futures would be more work, as you would have to consistently roll the futures to match VXXB. Are there advantages to this approach though?
Futures are a pure play. Futures require low margin. Futures trade over 22 hours a day. Futures are not subject to wash sales and are 1256 contracts. Futures never require a locate or a borrow fee-either long or short. The VXXB: is not PM eligible. might be hard to borrow one day? are trade from 4am to 8pm but not liquid that entire time. we hold them at 100% at this time. on a positive for the ETN, you can play smaller size.
Robert makes several good points. I'll add that since VXXB is an ETN, it tracks the rolling futures index exactly. Replication by futures may/will have a market cost.
Do you mean to single out ETNs in particular (vs ETFs)? Yes XIV was shut down, but couldn't that have been SVXY as well?
ETN's carry counterparty risk which is not the case for ETF's. Most of the time these counterparty risk is not priced properly. Lehman issued couple of ETN's just before collapse. Holders of these ETN's got 15 cents on the dollar. There was another peculiar case where i read, investors who shorted ETN continued to pay short interest rate even after it went to zero. I cannot dig out that article.
ETNs are not really equity products and look more like a debt security. I do not understand them and when they can disappear. I stay away from investing in what I do not understand.
First of all, thank you for all your feedback here and always. It is very helpful. I share your concerns about ETNs. What happened to XIV was certainly eye opening. That being said I do feel more comfortable with something like VXXB considering it is long exposure and not leveraged. I believe Barclays wrote in a termination clause in the new VXXB prospectus but hard to see that coming into effect. Feb 5th 2018 was a pretty extreme event and a very very crowded trade at the time. I dont think its nearly as crowded these days. At least all the Target workers got shaken out
This contract specs should help anyone who wishes to use the VIX futures https://optimusfutures.com/tradeblog/encyclopedia/volatility-futures-index-specification