Wall Street battles for supremacy in volatility market

Asset managers vie to launch replacement for iconic VXX fund

Afight for assets has erupted among volatility funds that allow investors to bet on gyrations in the stock market, as the current market-leading exchange traded product enters its final days.

Barclays’ $ 700m exchangetraded note, known by the ticker VXX, was the first of its kind when it launched in January 2009. The fund buys futures contracts on the Vix volatility index, also known as Wall Street’s “fear gauge”, which typically rises as equity prices fall.

However, unlike more traditional exchange traded funds, ETNS are structured as bonds with a fixed maturity. Barclays is hoping to lure investors to a successor ETN called VXXB when its predecessor dies on January 29, but sharp-elbowed challengers have spotted an opportunity to knock the bank from its pole position.

“There is a clash to see who will replace that product,” said Nick Cherney, head of exchange-traded products for Janus Henderson, who was also on the team that first created Barclays’ VXX. “Everybody is competing for that flow.”

Velocityshares, an arm of fund manager Janus Henderson, this week clipped fees on a replica product called VIIX to try to lure assets away from Barclays, dropping its “expense ratio” to 70 basis points from 75bp, after cutting the rate from 89bp in June. The move undercuts the 89bp charged on Barclays’ VXX and VXXB products.

Barclays is hoping VXX’S size and volume — trading 20 times more frequently than the $161m VIXY, its leading challenger — will encourage investors to migrate to VXXB. Barclays owns the majority of the $184m in assets in its replacement VXXB ETN to boost liquidity and encourage investors to switch from VXX.

Yet Proshares, another aggressive ETF provider, is also keen to gather assets for its Vix Short-term Futures ETF, known as VIXY.

“It’s a unique opportunity. You have to make hay while the sun shines and right now the sun is shining,” said Ben Fulton, who runs Proshares’ tactical products group. He declined to comment on the prospect of cutting fees for VIXY, which has a 85bp expense ratio.

Vix-linked products have became popular with investors in recent years, leading investment groups to launch more than 40 different funds, with VXX and XIV, its mirror-image “short” Vix fund backed by Credit Suisse, by far the most popular.

Vix funds that bet on turbulence have seen losses in the years since the crisis as markets have remained largely calm, but that came to an abrupt end in February last year. Exchange traded products that bet on volatility remaining subdued were hit hard, forcing Credit Suisse to shutter XIV. But VXX and similar “long” volatility products saw hefty short-term gains.

Indeed, VXX went out with a bang before its scheduled demise, returning almost 68 per cent last year — its only positive year since its birth.