The Double Leveraged Vix ETN Is The Industry's Latest Bizarre Concoction

Credit Suisse, via their VelocityShares platform, are bring investors a new way to deal with volatility today: The VelocityShares Daily 2x VIX Short Term ETN linked to the S&P 500 VIX Short-Term Futures™.

Confused? So were we. Zero Hedge had his say, suggesting, “…we wonder why anyone would trade this product, when, with much better odds, one would at least get comped in Vegas…”

Along with a batch of new ETN releases, this one stood out for its sheer complexity. But who’s it for?

From the SEC release (emphasis ours):

The ETNs, and in particular the 2x Long ETNs, are intended to be trading tools for sophisticated investors to manage daily trading risks.  They are designed to achieve their stated investment objectives on a daily basis, but their performance over longer periods of time can differ significantly from their stated daily objectives.  The ETNs are riskier than securities that have intermediate or long-term investment objectives, and may not be suitable for investors who plan to hold them for longer than one day.  Accordingly, the ETNs should be purchased only by knowledgeable investors who understand the potential consequences of investing in volatility indices and of seeking inverse or leveraged investment results, as applicable.  Investors should actively and frequently monitor their investments in the ETNs, even intra-day.

So, for the casual investor looking to use such products to diversify their portfolios, these aren’t of interest.

But what about the power to diversify in commodities? That too might be a misunderstanding.

From the Reformed Broker, Josh Brown, for The Wall Street Journal:

When sugar and software are inextricably correlated, why double a client’s risk profile by treating the two as though they somehow offset each other?

ETF and ETN investors might want to keep an eye on instruments they think they understand, or investments they believe are diversifying their portfolios, but actually just making things worse.

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