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Source and Nomura get tactical with volatility ETF
by Emma Dunkley on Apr 10, 2012 at 10:08
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.
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