Wealth Manager - the site for professional investment managers

Register for full access to Citywire’s Fund Manager database, news and analysis. Registration is free and only takes a minute.

Source and Nomura get tactical with volatility ETF

Source and Nomura get tactical with volatility ETF

Exchange traded fund (ETF) provider Source has partnered with Nomura for the launch of an ETF providing tactical exposure to volatility.

The fund, which is the latest in Source’s tactical volatility line-up, aims to capture spikes in volatility while mitigating the costs of rolling over volatility contracts.

More wealth managers are seeking volatility as a standalone asset class but also as an equity hedge, especially as the advent of ETFs has provided an effective and liquid means of accessing this growing investment space.

The Nomura Voltage Strategy Short-Term 30 day USD TR index, which underlies the ETF, consists of futures on the CBOE Volatility index.

The dangers of playing volatility

However, futures can fall into contango, which is where the cost of purchasing longer-term contracts is greater than shorter-term future prices, meaning that exposure to volatility over longer periods of time can be expensive.

Moreover, some volatility ETFs have struggled to capture the full upswings in volatility measures like VIX.

Nomura and Source's index is designed to mitigate the contango risk and cost of rolling futures contracts, by reflecting the exposure to volatility through the S&P 500 VIX Short-Term Futures Index TR, while varying the level of exposure based on the Nomura Voltage allocation model.

This means the index can both capture spikes in volatility while reducing the cost of contango.

Mohamed Yangui, head of equities structuring at Nomura, said: ‘Although our existing medium-term Voltage ETF is very popular as a buy-and-hold hedge, we see some clients looking for more responsive exposure, something more closely aligned to spot VIX.

‘Short-term VIX futures are very reactive to spikes in volatility, but, over time, investors suffer as the rolling costs can be painfully high. This strategy aims to significantly reduce the impact of those costs.’

The ETF, which has an annual management charge of 0.30%, uses swap-based replication to track the index.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play Investment Pulse: the highs and lows of 2014

Investment Pulse: the highs and lows of 2014

This week's Investment Pulse looks back at some of the biggest stories of the year as well as looking forward to 2015.

Play Inside ETFs: Why the US bull-run still has legs

Inside ETFs: Why the US bull-run still has legs

Global equities suffered a sharp sell-off in the third quarter but exchange traded fund investors are continuing to back the US to outperform in 2015

Play Paul Niven: I won't rip up the Foreign & Colonial Trust history book

Paul Niven: I won't rip up the Foreign & Colonial Trust history book

The newly appointed manager of the Foreign & Colonial trust talks about his plans for UK's oldest investment company.

Your Business: Cover Star Club

Manchester wealth firm hires Coutts director for London launch

Manchester wealth firm hires Coutts director for London launch

Former Coutts director Tony Robinson has joined Chartered Wealth Management to head the company’s newly opened London office.

Wealth Manager on Twitter