Thursday, September 2, 2010

Barclays VEQTOR ETN (VQT) Begins Trading

Both volatility traders and long-term investors should be interested to know that Barclays launched the launched the ETN+ S&P VEQTOR ETN (VQT) yesterday. Flying mostly under the radar, this ETN traded only 300 shares in its first day. That being said, I think VQT is probably the most interesting volatility product launched to date, with dynamic hedging rules that make it the first actively managed off-the-shelf volatility product for the retail investor.

I promise a more detailed analysis of VQT in the near future, but for now suffice it to say that the ETN essentially consists of a long position in the S&P 500 index, hedged with a volatility position (VXX) that varies daily, based on how the ETN evaluates volatility risk, largely using realized volatility and implied volatility calculations. The table below shows that the two main inputs into determining the VXX allocation are the current level of realized volatility and the direction of the implied volatility trend. The equity component of VQT is set to vary in a range of 60-97.5%, with the volatility component comprising the balance of the VQT at anywhere from 2.5-40%.

The concept behind VQT is an extremely attractive one, as it includes some built-in disaster insurance in the form not just of a volatility hedge, but also a stop loss feature, which is triggered whenever the 5-day return of the VEQTOR index on which VQT is based is equal to or less than -2.0%.

The specific implementation of volatility rules deserves more detailed treatment, which I will take up in subsequent posts. In the meantime, readers are encouraged to study the pricing supplement for VQT.

Note that VQT bears an extremely strong resemblance to a forthcoming VEQTOR product from Direxion that I discussed a little over a month ago in Direxion and S&P Bring Dynamic Volatility Hedging to ETFs with VEQTOR.

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[source: Barclays]

Disclosure(s): neutral position in VXX via options

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