The VelocityShares Daily 2X VIX Short-term Exchange Traded Note (ETN), symbol TVIX, from Credit Suisse has been in the news this week due to its price collapse. The company halted share creations on February 21st apparently due to excessive asset growth in the ETN which triggered internal risk controls.The ETN tanked this week, down over 50% for the week.
It is first important to understand that TVIX is an ETN, which differ from ETFs in that ETNs are debt obligations of the issuer. There is no underlying stock or commodity backing an ETN while an ETF such SPY is obligated to hold a basket of stocks using the methodology detailed in the prospectus. ETNs are essentially a promise-to-pay or IOU of the issuer.
However, the recent and sudden price decline in TVIX appears to have less to do with the credit risk inherent in an ETN and more to do with the fact that even after Credit Suisse halted share creations in February the market continued to bid up TVIX to an incredibly high premium to net asset value. TVIX was essentially trading at a huge premium to NAV yet investors continued to demand (buy) the product.
The recent price action in TVIX is a learning experience, especially for investors in the VIX and leveraged ETF/ETN world.It is also an important reminder of the difference between ETFs and ETNs and a reminder for all investors to understand the products in which you invest and trade.
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TVIX Goes Haywire
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