UBS Closes All Except One ETRACS Volatility ETN

September 12, 2012 /

The path to exchange traded fund purgatory got even more crowded Wednesday as Swiss bank UBS liquidated all but one of its ETRACS volatility-tracking exchange traded notes.

The 12 ETNs offered long and short exposure to volatility or VIX futures contracts dated one to six months out. After a year on the market, these gathered between $2.73 million to $19.74 million in assets each — far short of the $25 million to $50 million typically needed for providers to break even.

UBS is sparingUBS ETRACS Daily Long-Short VIX ETN ( XVIX ), with $23 million in assets.

“The big issue with VIX products in general is that they weren’t very intuitive,” said Christian Magoon, CEO of Magoon Capital. “Investors had to do significant research before employing these products in their portfolios.”

The ETRACS with long exposure charged a slightly smaller annual management fee of 0.85% than its competitors, but was a Johnny-come-lately in a crowded field. VelocityShares’ family of six VIX ETNs debuted in December 2010 — nearly a year earlier.

They charged a 0.89% annual management fee. Half the VIX ETNs in Barclays’ iPath suite had a three-year head start over ETRACS. The iPath ETNs carry a 0.89% to 0.95% annual expense ratio.

The ETRACS with short exposure, on the other hand, charged a whopping 1.35% annual fee along with a 0.77% weekly hedging fee.

Too Expensive?

They “should never have been allowed to exist in the first place,” said Ron Rowland, founder of that features the notorious ETF Deathwatch List.

He calculates the actual fees totaled an exorbitant 5.35% annually — the industry’s highest.

The VIX, also known as the fear index, gauges the volatility of options on the S&P 500. The VIX measured in percentage points shows the expected movement of the S&P 500 in either direction over the upcoming 30-day period, which is then annualized.

High VIX readings mean traders expect the market to make large moves up or down. Low VIX readings mean traders expect the market to move in a tight range.

ProShares Suit Dismissed

A U.S. District Court judge in New York has dismissed this week a class-action lawsuit against ProShares.

The lawsuit filed in 2009 by New York-based Zamansky & Associates alleged that the leveraged and inverse ETF provider’s information pamphlets were “wholly inadequate and misleading and didn’t make clear that the funds were intended for day trading only.”

Judge John Koeltl ruled that ProShares disclosed in plain English that its leveraged and inverse ETFs only track the daily performance of their underlying benchmarks and could “diverge significantly from the underlying index when the ETFs were held for longer than one day.”

Koeltl added that ProShares clearly stated the risks that any “reasonably prudent investor would have understood.”


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