This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

VIXH ETF Touts 'Black Swan' Protection

NEW YORK ( TheStreet) -- First Trust CBOE S&P 500 VIX Tail Hedge Fund (VIXH) began trading Thursday. The underlying CBOE VIX Tail Hedge Index is based on the S&P 500 and an amount of one-month call options on the CBOE Volatility Index (VIX) ranging from 0% to 1% of the portfolio. The exact amount is determined by the level of forward volatility.

"Black swan" events are defined to be those that are both a surprise and have a major impact. 

In statistical terms, they are often referred to as 3-sigma (three standard deviations) events, and more recently the term "tail risk" has been used in financial circles. 

VIXH's objective is to hedge away the tail risk of equity exposure. According to the VIXH overview page , on the day of the monthly expiration of VIX options, previously purchased VIX calls are cash-settled and new VIX calls are purchased by the index at the 10:00 a.m. Central Time asking price. The percentage of money allocated to VIX calls depends on the level of forward volatility of the S&P 500 at the next call expiration as measured by the opening price of VIX futures with the same expiration as the calls as follows:

  • VIX futures less than or equal to 15, no VIX calls are purchased
  • VIX futures above 15 and less than or equal to 30, 1% of portfolio in VIX calls
  • VIX futures above 30 and less than or equal to 50, 0.50% of portfolio in VIX calls
  • VIX futures above 50, no VIX calls are purchased

The dynamic allocation to VIX calls is designed to reduce hedging costs by limiting the number of VIX calls that are purchased during periods of expected low volatility.  It also has the effect of taking VIX option profits when extreme volatility levels are reached.

VIXH is holding all 500 stocks of the S&P 500, in the appropriate allocations.  The new ETF has an expense ratio of 0.60%, and additional information is located in the fact sheet (pdf) and prospectus (pdf).

Analysis/Opinion:  I have long held the belief that exposure to the VIX provides an excellent way of reducing risk in an equity portfolio, and addressed that topic in my 2009 article New ETNs Allow You to Buy Volatility: VXX, VXZ

Unfortunately, no products are available that track the VIX.  Instead, traders and investors must be content with VIX futures and options, which have their own unique characteristics.  The new VIXH uses VIX call options.

With an upper range of 1% per month, the performance impact of constantly hedging at the maximum level could be significant.  In order to potentially control hedging costs, the underlying index and VIXH reduce hedging to 0.5% when the VIX is between 30 and 50.  Additionally, no hedging is used when VIX is below 15 or above 50.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,265.99 +109.14 0.64%
S&P 500 2,011.36 +9.79 0.49%
NASDAQ 4,593.4250 +31.2360 0.68%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs