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

Point Hedges ETP Performance During Invasion of Ukraine

On Friday in Flight-to-Safety ETP Performance During Invasion of Ukraine, I reviewed the performance of some of the traditional flight-to-safety ETPs (Treasuries, gold, currencies and volatility) that are often used to hedge an equity-centric portfolio. 

Evaluating the performance of these ETPs since Russia invaded Ukraine a little over a month ago, I found some rather lackluster numbers.  As a group, these products have not even broken even since the invasion of Ukraine.

This time around, I have elected to look at the performance of some less traditional ETPs, including some much more targeted products that I have referred to in the past as “point hedges.”  Specifically, I looked at areas where exports from Russia and Ukraine are a significant portion of the global export market and whose disruption could have a significant impact on the global balance of supply and demand.  As it turns out, these commodities were easy to identify and the price dislocations have generally dwarfed the appreciation one might have been able to realize with more traditional hedges.

These products include: 
USO: West Texas Intermediate Crude Oil (solid red line)
UNG: Natural Gas (dark purple line)
DBB: Base Metals (light green line)
DBA: Agriculture (violet line)
WEAT: Wheat (light blue line
CORN: Corn (black line)
ITA: Aerospace & Defense (medium blue/green line)

[Note that nickel (JJN) should be on this list, but in part due to some chaos and mismanagement at the London Metal Exchange, JJN prices jumped have had multiple spikes of more than 100% and dwarf the performance of other ETPs in this graphic.  Additionally, for the international crude oil market, Brent crude oil (BNO) is typically a better measure than USO, but since the  Russian invasion of Ukraine, the two ETPs have only differed in performance by about 2%.]

It is easy to play Monday morning quarterback and say that with hindsight it is easy to pick the winners, but anyone who studied Ukraine’s biggest contributions to the global export market could have deduced that a supply shortage in wheat and corn was likely and for Russia, natural gas, crude oil and nickel were three areas of high risk in terms of their strategic value to the West, with wheat and corn also part of the equation.  I threw in aerospace & defense as a general military hedge.

Unlike the inconsistent and largely negative performance of more traditional flight-to-safety ETPs since the Russian invasion, the point hedges above have all seen gains of at least 3% during this period – and if you remove aerospace & defense from the mix, all the gains are at least 6.8% or higher. 

This is not to say that more narrow point hedges will usually outperform the broader traditional hedges during periods of geopolitical turmoil, but rather to remind readers that instead of a more generic hedge, a targeted hedge or speculative trade often has the potential to deliver substantially greater returns, such as the median 13% returns from the group of ETPs above.

This also means, of course, that should there be progress in the talks between Russia and Ukraine that each of these point hedges is exposed to the potential of a significant decline in price.

[source(s):  StockCharts.com]

Further Reading:
Flight-to-Safety ETP Performance During Invasion of Ukraine
Safe Haven Options Shrinking?
Chart of the Week: Flight-to-Safety ETPs
Revisiting the Flight-to-Safety Trade
Chart of the Week: The Flight-to-Safety Trade
Why Not Point Hedges?
Cheating with Partial Hedges
Forces Acting on the VIX
A Conceptual Framework for Volatility Events

While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.

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

Disclosure(s): Net short VXX and long USO, DBB, DBA and ITA at time of writing