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ProShares slashes leverage on surviving volatility ETPs

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After this month’s volatility earthquake caused the blow-up of a number of exchange-traded products linked to Wall Street’s fear gauge, an issuer of similar surviving funds is trying to prevent any aftershocks.

ProShares Advisors has announced changes to its investment objectives to reduce leverage on its Short VIX Short-Term Futures ETF (SVXY) and Ultra VIX Short-Term Futures ETF (UVXY). The former, which allowed investors to bet against a rise in volatility, is now aiming to deliver returns equal to one-half the inverse move of the S&P 500 VIX Short-Term Futures Index. Previously, the product had sought to be a perfect mirror image each session.

UVXY, a long volatility product, will attempt to produce returns equal to just one-and-a-half times the underlying index, rather than double the daily move. VIX futures are derivatives on the CBOE Volatility Index (VIX), a gauge of the S&P 500’s projected one-month price swings.

On Feb. 6, Credit Suisse announced the redemption of a fund similar to SVXY — the VelocityShares Daily Inverse VIX Short-Term exchange-traded note (XIV) — after a record one-day spike in the VIX wiped out 90% of the value in the inverse product. The popularity of ETPs that allowed investors to wager on enduring market calm exacerbated the downside for U.S. stocks that week, according to some analysts, helping to catalyze a technical correction.

SVXY — now the largest ETP of its kind — also plunged more than 90% in extended trading that Monday, but was not shuttered.

ProShares’ shifts will be effective as of the close of trading on Feb. 27, according to a press release. However, a permanent change of these investment objectives will require regulatory approval, the ETP provider said.

The moves may push some holders of the products to rebalance their positions to adjust for the decreased leverage, likely at a cost. They will also have an adverse effect on traders who had bought options on either product.

“Ignoring whether we get inflows or outflows … should create a bit of buying pressure on VIX futures,” Peter Tchir, head of macro strategy at Academy Securities, said in a note to investors. “It seems to have the potential to impact options on VIX products, especially if it reduces the risk of a VIX spike.”

Messages left with a ProShares spokesperson were not immediately returned.

An excerpt from the recently-updated prospectus for these products lists increases in margin requirements from exchanges as well as position limits by futures commission merchants and the need to comply with regulatory requirements as potential factors hampering their ability to meet their investment objectives. “High margin requirements could prevent a fund from obtaining sufficient exposure to VIX futures contracts and may adversely affect its ability to achieve its investment objective,” it said.

Both long and short investments focused on volatility were mostly crushed lately.
February 14

“Buyers of either calls or puts have paid premia that were based on much higher implied volatility values than will be prevailing post the proposed changes,” said Athanassios Diplas, principal at Diplas Advisors. “Similarly, anyone directly trading these two ETPs, either long or short, whether for hedging or direct investment, will have to adjust their exposures, and incur the associated costs of rebalancing.”

ProShares’ changes should also reduce the chance of an “acceleration event” that could facilitate the closure of either product, if regulatory blessing is received.

“The reduction in leverage reduces the amount these products need to trade daily, and makes SVXY less likely to blow up again,” said Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors. “It’s harder for VIX futures to go up 200% in a single day compared to going up 100% in a single day.”

ProShares noted that the products do not directly track the VIX Index, and are intended for use as trading vehicles rather than long-term holdings.

Bloomberg News