2x Leveraged VIX ETFs Are Back!

The ultra-popular TVIX was delisted last year, but its replacement will soon be available.
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If you were a fan of trading the leveraged and inverse VIX products that are all the rage before one of them went bust in 2018, wiped out nearly $2 billion of investor money and was the biggest contributing factor to a sharp 10% correction in the S&P 500, I've got good news for you!

They're back!

Well, not the original products (at least the ones that ended up going under in the first place), but new versions of them that are very similar to the old ones with a few new modifications. These safeguards were recently approved by the SEC and it's this approval that will allow the return of inverse and leveraged VIX products, probably later this month.

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There's a lot to unpack here in terms of the why's and how's, so let's run down all the major questions that investors might have.

What happened in 2018?

VIX-related products were very popular in the year and a half leading up to some of them crashing and burning. The VIX was steadily declining during the 1st quarter of 2016 and mostly stayed below 15 and culminated in a stretch from May 2017 through January 2018 where it averaged around 10. This was one of the lowest levels the index had ever seen for such an extended period.

The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) was one of the most popular ways of playing the trend. Since its performance is based on the opposite of the VIX, it produced steady gains for investors during this period of extreme market calm.

It worked great until it didn't.

In early February, the markets began correcting and volatility soared. In a matter of a couple trading days, the VIX went from 12 to 50 and XIV's value fell through the floor. On February 5th, 2018, XIV fell more than 90% and investors were essentially wiped out.

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The VIX products immediately came under fire for their complexity and underlying risks. Within two weeks, XIV was liquidated altogether and closed. A similar leveraged product, the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) survived for a while longer, but it was delisted back in 2020 when Credit Suisse announced it letting go of most of its lineup of VIX and commodity ETNs in order to "better align its product suite with its broader strategic growth plans". In reality, the bank was exposing itself to a lot of risk operating these products and probably wanted to take some risk off the table.

It's worth noting that TVIX wasn't liquidated, it was simply delisted. It still technically exists and you can still trade it, but it's available only in the OTC market under its new ticker, TVIXF.

What are the new products?

VolatilityShares, a company that on its website uses the tagline "reinventing volatility" and describes its process as using "custom volatility indexes to create Exchange Traded Funds (ETFs)", filed for two brand new funds - one which would track the inverse of the VIX and one which would track two times the VIX. These would essentially be new versions of the products that existed in the past with a couple of slight modifications.

VolatilityShares does not current operate any ETFs and shouldn't be confused with VOLSHARES, which runs the VOLSHARES Large Cap ETF (VSL).

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Why are leveraged VIX products returning now?

The big problem with VIX products back then was the product's settlement pricing structure, which encouraged traders to get in and out of positions before a certain cutoff time. Without getting too far into the weeds, this had the potential of creating spikes that could exacerbate losses, as it did in 2018.

The new filings would instead use a weighted average pricing methodology in order to smooth out some of the biggest swings that could occur. Think back to when the oil ETFs almost went under (actually, some did) when crude prices went negative. The United States Oil Fund (USO) went from owning only the nearest expiration crude oil contracts to spreading out its exposure to contracts with expirations as far as one year into the future. It did this to water down the product's biggest risks while still offering exposure to the oil market. It's sort of the same idea with these new VIX ETFs.

In the SEC's decision to approve this new structure, it appears satisfied that this will help perhaps prevent the meltdown that occurred a few years ago, but won't eliminate the risks of these products. They will still be prone to large swings in value as market conditions change. Gary Gensler acknowledges that these products will still not be appropriate for many investors and they should do their homework before diving in.

Are the new VIX ETFs the same as the old ones?

They're not identical, but for the most part, yes. We don't have all the details yet, but they're going to track VIX futures contracts and will move in high correlation with changes to the VIX.

In terms of the different settlement pricing structure that won the SEC's approval, you probably won't see much impact from that until you see a major volatility event. Even then, it might be difficult to assess the impact.

The average investor probably won't see much of a difference.

When will they launch?

We don't have a lot of details of the VolatilityShares products yet, including a launch date, but I'd guess we're looking at this beginning to trade before the end of October. It could also take a while to get everything in order, I think we'll see this sooner rather than later.

Will they be successful?

Very likely.

If you look at the landscape today, there are still a few VIX-related products still out there, the ProShares Short VIX Short-Term Futures ETF (SVXY) and the iShares Series B S&P 500 VIX Short-Term Futures ETN (VXX) being among the largest. We just haven't seen much in the way of volatility lately, so these haven't gotten a great deal of attention. Once we see a volatility spike, we'll see interest in these pick back up.

To give some perspective, TVIX was the most actively traded security on Robinhood for a brief time just before it got delisted. Other VIX products were also fairly actively traded as well, but it was the leveraged nature of TVIX that drew in the most interest. With the Reddit, Robinhood and meme stock crowds developing significantly since this occurred, I'd expect to see the 2x ETF especially get a lot of attention.

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