The Latest on VXX and Additional Creation Unit Suspensions by Barclays

It has been 1 ½ months since Barclays announced the suspension of new creation units in the popular iPath Series B S&P 500® VIX Short-Term Futures ETN (VXX).  Today, we received some additional information from Barclays in conjunction with their earnings report. 

In a press release today, Barclays announced that it has suspended new creation units in an 31 Barclays iPath ETNs in addition to the VXX and OIL creation unit suspensions from March 14^th.  The full list of ETNs with suspended creation units, sorted by average volume, can be found here, with a top five consisting of VXX, DJP, OIL, GRN and JJN.

Barclays provided some context for what is going on behind the scenes:

“Barclays PLC announced today that Barclays Bank plans to restate the financial statements included in its Annual Report on Form 20-F for the year ended December 31, 2021 (the “Form 20-F”) filed with the Securities and Exchange Commission (the “SEC”) and to amend the Form 20-F to reflect such restatement and to change its conclusions with respect to the effectiveness of its internal control over financial reporting and disclosure controls and procedures.  Because the registration statement and prospectus under which Barclays Bank makes sales of each series of ETNs incorporates by reference the Form 20-F, Barclays Bank and its affiliates cannot continue to make sales under such registration statement and prospectus until the restatement is completed and Barclays Bank files an amended Form 20-F and a new shelf registration statement. Barclays Bank expects to reopen sales of the ETNs when the amended Form 20-F and new shelf registration statement have been filed with the SEC and will make a further public announcement when this action is taken.”

In a nutshell, we are now going to have to wait until we have an earnings restatement for FY 2021 – and the timetable for that is highly uncertain.

In today’s Barclays PLC Q1 2022 Results Announcement release, the company discusses the matter in more detail in the notes section on (original numbering) pp. 29-31 and highlights the following:

“Barclays remains committed to its structured products business in the US and expects BBPLC to file a new shelf registration statement with the SEC as soon as practicable following the amendment of the BBPLC 2021 Form 20-F. For further details, please refer to the notes to the condensed consolidated financial statements accompanying this Q122 results announcement.”

This likely means that Barclays has no intention of shutting down VXX and accelerating the termination at the indicative value price.  That said, the earnings restatement hurdle does not seem like a quick fix, so…both longs and shorts have significant risks (see Further Reading links below for more details) with the VXX premium to its intraday indicative value (IV) (VXX.IV) currently at 13.6%.

Further Reading:
VXX Premium to Indicative Value Falls Slightly to 26%
VXX Upside vs. Downside Risk with No New Creation Units
Barclays Suspends Creation Units for VXX
Attempt at TVIX Short Squeeze Fizzling Out
The Resurrection of TVIX
TVIX Premium to Indicative Value Creeping Back Up
TVIX Creation Units Return; What It Means for Investors
Is TVIX Now Just a More Docile UVXY?
Recent TVIX Volume and VIX Futures Volume
The Story of VIX ETPs Relative to their Intraday Indicative Values
The Ups and Downs of the New Premium in TVIX
Credit Suisse Suspends Creation Units in TVIX: What it Means
Four Key Drivers of the Price of TVIX
Will TVIX Go to Zero?
Who Is Trading TVIX?
Volatility Becomes Unhinged on Friday
TVIX Finally Getting Its Due As Day Trading Rocket Fuel
All About UVXY

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): net short VXX at time of writing

LSC Long-Short Commodities ETF Struggling Mightily

Launched in June 2008, the ELEMENTS S&P Commodity Trends Indicator ETN (LSC) was an immediate hit with retail investors, attracting a considerable volume, offering diversification from an equity-heavy portfolio and even using a long-short approach to take advantage of both bullish and bearish trends in commodities. By the end of the 2008, the ETF was already up more than 6%.

Unfortunately, since the end of 2008 the ETF has been steadily losing ground and is now down 44% from its 2008 high water mark. The graphic below, from ETFreplay.com, shows LSC’s performance relative to broadly diversified commodity ETFs, RJI and DJP over the course of the last year. While the graphic alone may make LSC appear to be an attractive short, I think it is important to note that the prospectus has historical data going back to 2001 which shows excellent long-term performance characteristics.

A look under the hood shows that LSC’s trend following approach uses a 7-month exponential moving average (EMA) to evaluate trends in the following 16 commodity futures contracts:

• Wheat (CBOT: W)
• Corn (CBOT: C)
• Soybeans (CBOT: S)
• Cotton (NYCE: CT)
• Cocoa (CSCE: CC)
• Sugar (CSCE: SB)
• Coffee (CSCE: KC)
• Live Cattle (CME: LC)
• Lean Hogs (CME: LH)
• Copper (COMEX: HG)
• Gold (COMEX: GC)
• Silver (COMEX: SI)
• Heating Oil (NYMEX: HO)
• Light Crude Oil (NYMEX: CL)
• RBOB Gasoline (NYMEX: XB)
• Natural Gas (NYMEX: NG)

Based on where the commodities are relative to the EMA, the ETF will go long or short, or have a neutral position. The one exception is crude oil, where the ETF is only allowed to be long or flat. The prospectus lays out the rationale for the short restriction on crude oil as follows:

Energy, due to the significant level of its continuous consumption, limited reserves, and oil cartel control is subject to rapid price increases in the event of perceived or actual shortages. For example, although a problem of this magnitude has not occurred historically, if the Index were capable of shorting the energy sector and a catastrophe occurred which caused Light Crude prices to surge dramatically while the energy Sector allocation was set to short, the Index would lose a significant portion of its value on the Light Crude position alone. Because no other sector is subject to the same continuous demand with supply and concentration risk, the energy sector is never positioned short in the Index.

LSC evaluates all futures contracts at the end of each month and makes any new long-short decisions at that time. The current (July) positions of LSC are as follows:

Those interested in additional information on LSC should try:

• LSC’s Prospectus and Pricing Supplement
• LSC’s Elements Home Page
• LSC on Wikinvest

Going forward, I think the “…and More” portion of this blog will begin to place increased emphasis on the commodity space, including ETFs, futures and options on commodities.

As an aside, there are two new ETF sites that have recently launched which offer a great deal of promise to ETF investors:

• ETF Prophet – a collaborative effort that includes two bloggers from my blogroll: ETF Rewind, and BZB Trader – as well as several highly regarded up-and-comers
• ETF Channel – run by the same people who are responsible for the excellent Value Forum site

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: Impact of Falling Euro on Stocks and Commodities
• Chart of the Week: Commodities and the Dollar
• Chart of the Week: Breaking Out Recent Commodities Moves
• Diving a Little Deeper into Strategy-in-a-Box ETFs
• CME to Use VIX Methodology for New Crude Oil, Corn, Soybean and Gold Volatility Indices
• Some Favorite ETF Sites
  
  

[sources: ETFreplay.com, ELEMENTS/Merrill Lynch]

Disclosure(s): short LSC at time of writing

Speculation in Commodities vs. Technology

During the course of the five year bull market that appears to have ended last October, the technology and commodities sectors have been two areas where a considerable amount of speculative money has flowed in search of extraordinary returns.

Since October, money has flowed out of technology, as indicated by the action in IGM, a popular technology ETF. Conversely, speculative money has been flowing in large quantities into commodities, as the action in gold, agriculture, oil, natural gas and other commodities can attest to. While there are a number of commodities indices and ETFs out there, many of them (notably the CRB Index, but also the GSCI) have such a heavy weighting in oil and gas as to make them de facto energy indices and not a good proxy for a broader representation of industrial metals, precious metals, agricultural commodities and the like. For this reason, I have chosen to highlight the iPath Dow Jones AIG Commmodity Index (DJP) as my broad-based commodities benchmark (the Rogers International Commodity Index, ticker RJI, is also broadly diversified, but is only it its fifth month of operation.)

Looking at a ratio of the IGM and DJP ETFs or stacking them on top of each other, as I have done below, you can see the flow of speculative money out of technology and in to commodities. For those seeking a strong upward trend in the current downturn, commodities represent an excellent opportunity. Conversely, when speculative money starts flowing out of commodities and back in to technology, expect to see the NASDAQ and other broad indices stage a more sustained move to the upside.