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nomura suspends leveraged ETF new creations

Nomura Says Sayonara to New Leveraged ETF Creations

Sayonara City As Japan Getting Crash Course in Leveraged Returns With Nikkei ETF

MarketsMuse ETF update courtesy of Bloomberg LP Oct 15–Nomura Asset Management Co. said it would suspend on Friday the creation of new shares in a large leveraged exchange-traded fund, as well as two others, citing liquidity concerns.

The move applies to the Next Funds Nikkei 225 Leveraged Index Exchange Traded Fund (BBRG Ticker: 1570 JP Equity <GO>), which has about ¥734 billion ($6.2 billion) in assets. The fund’s shares are up about 8.7% this month. Nomura said shares will continue to trade.

“The temporary suspension has been determined, considering the current situations of fund management including the liquidity of the underlying Nikkei 225 futures and the total assets under management of three ETFs,” Nomura posted on its website. The firm will continue to receive redemptions, it said.

A Nomura representative wasn’t available to comment.

The decision highlights an increasingly warned-about side effect of exchange-traded products’ growing popularity: a mismatch between the liquidity of some funds and their holdings.

The Nomura decision also highlights concerns about leveraged products, which provide investors with outsize exposure to certain asset classes, employing tactics such as borrowed money and derivatives. The $6.2 billion fund provides investors with two times the exposure to the Nikkei 225.

The products have been popular in the U.S., but the size of Nomura’s Next Funds Nikkei 225 Leveraged Index ETF is larger than any such leveraged exchange-traded product in the U.S., said Dave Nadig, director of ETFs at financial-data provider FactSet. There are close to 1,800 exchange-traded products listed in the U.S., and about 230 of them are leveraged, he said.

Regarding how leveraged funds operate, Mr. Nadig said: “The math makes people’s heads hurt.”

It’s not the first time an exchange-traded product has run into obstacles because of its own popularity. Credit Suisse Group AG had to suspend the creation of new stock in the VelocityShares Daily 2x VIX Short-Term ETN in February 2012, after demand for the security hit a limit set when the product was created in 2010. Barclays Plc also halted issuance in its iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN in August 2009.

For the full story from Bloomberg LP, please click here

Goldman Smacks ..It’s Lips re: ETFs; In Discussions to Acquire ETF Issuer IndexIQ

MarketMuse update courtesy of exclusive reporting by Reuters’ Jessica Toonkel

On the heels of this week’s announcement by Janus Capital to acquire ETF Issuer VelocityShares, presumably as a vehicle for Bill Gross to further package his fixed-income strategies, and this past June’s announcement from the London Stock Exchange to acquire index specialist Frank Russell Company, the bubbling market for ETF platforms is bubbling even more..as evidenced by this scoop from Reuters’ Jessica Toonkel:

(Reuters) – Goldman Sachs Group is in discussions to acquire IndexIQ, a Rye Brook, New York-based exchange-traded fund provider, according to three sources familiar with the situation.

The deal, if finalized, would enable Goldman to introduce passively managed and actively-managed exchange traded funds within months.

A Goldman Sachs Asset Management spokeswoman declined to comment. A call and e-mail to Adam Patti, the chief executive of IndexIQ, was not immediately returned.

Read more: http://www.businessinsider.com/r-exclusive-goldman-sachs-in-talks-to-acquire-etf-provider-indexiq—sources-2014-10#ixzz3GLUDoUrf

Bill Gross Hire Further Bolstered by Janus; Announces Purchase of ETF Firm VelocityShares

Janus Capital Group Inc. said Monday it agreed to acquire exchange-traded product firm VelocityShares for at least $30 million.

The acquisition comes on the heels of Janus’ hiring of Bill Gross, one of the most successful bond investors in history, from Pacific Investment Management Co., the firm he co-founded in 1971. It positions Janus, a traditional mutual fund provider, in the fast-growing exchange-traded fund market.

“This acquisition positions Janus within the rapidly growing rules-based and active ETF universe, enhancing the customized solutions we can provide to our clients and enabling us to work with the growing segment of financial advisers and institutions focused on these instruments,” said Richard M. Weil, the Janus chief executive, in a statement.

Denver-based Janus will pay an “initial upfront cash consideration of $30 million” to buy VelocityShares parent company VS Holdings Inc. The Darien, Conn.-based firm manages $2 billion in ETFs.

Through the acquisition, Janus is adding clients including hedge funds as well as mutual and pension funds. Janus shares have risen 26 percent since Gross announced he would work for the Denver-based firm on the expectation that he would attract new investors to the company’s funds.

Volatility Bets and ETNs: Be Careful What You Bet On

wsjlogoExtract courtesy of Spencer Jakab, Wall St. Journal. Full article available via clicking on WSJ logo on left side..

“..Now that volatility has emerged not only as a concept but an investment in its own right, there probably is no putting the genie back in the bottle. And while portfolio managers largely welcome the products, the droves of speculators drawn to VIX notes may be in for a wilder ride than they realize…”

The latest big worry to hit markets is an unusual one: calm. With stock prices high and various gauges of risk low, investors appear to have thrown caution to the wind.

That isn’t entirely true, though. Exchange-traded notes that profit handsomely from market-shaking events have boomed since the financial crisis. But they have two big shortcomings: They may not work as designed in another financial crisis since their value depends on the bank backing them. And due to the way the products work, anyone holding these for the long term will inevitably see their value erode. Continue reading

ETP Volatility Report from Velocity Shares

VelocityShares is pleased to present the October 2012 Volatility Report, providing insights into the volatility landscape.

Highlights from this report include:

  • Year-to-Date Performance for the VIX Index is -21%.
  • Year-to-Date Performance for the S&P VIX Futures Indices:
    • Short-Term: -74% (SPVXSP)
    • Mid-Term: -47% (SPVXMP)
    • Tail Risk: -20% (SPVXTRSP)
  • VIX spot increased steadily in October, opening at 15.73 before closing the month at 18.40.
  • VIX Call Option Volume once again reached its second highest levels ever (and the most in over a year) on October 17th, 2012, nearing $850MM traded.
  • The Short-Term S&P 500 VIX Futures Tail Risk Index (SPVXTRSP) ended the month with a long-vol bias of 23.87% long, its greatest long exposure since June 2012.
  • Due to Hurricane Sandy, the stock exchange was closed for two days and reopened on October 31st. While a catastrophic event might be the cause of a spike in volatility, the following was observed:.
    • Short-Term VIX Futures gained 3.62%, which is within one standard deviation of the daily returns observed in October 2012
    • VIX Futures Dollar Volume on the 31st was greater than its 20-day moving average ($2.7B vs. $1.9B)
    • ETP Dollar Volume on the 31st was the same as its 20-day moving average ($1.4B each)
    • VIX Options Trading Volume on the 31st trailed its 20-day moving average (378K vs. 479K)

    For the full report, visit TABBForum.com


TVIX: Case Study ETNs & ETFs to be Wary Of-

Credit Suisse’s volatility-flavored ETN,  the VelocityShares Daily 2x VIX Short-Term ETN, aka “TVIX” is, for lack of a better phrase, broken.  And it ‘got broken’ in mid Feb when CS halted the creation process for this product.

Observed Chris Hempstead, the head of ETF trading for WallachBeth Capital, “the halt in the creation process caused the product to trade at an unnatural premium–as much as 80%– to the underlying NAV since the creation halt announcement was made.  For more than a month, hedge fund traders have been attempting to arbitrage the dislocation in pricing-and more than a few had based their strategies on the premise the creation process would not be resumed.  ”

Credit Suisse threw a fly into that ointment on Thursday night, when the firm announced it was re-opening the issuance of new units and, as Hempstead pointed out in desk notes to clients of his firm late Thursday night, “you can expect TVIX premiums to NAV to evaporate significantly, if not entirely when trading re-opens.”

Are there other products that display the same  unusual premium to NAV ‘features’?. Hempstead suggests that hedge fund traders who are dabbling in volatility-flavored products should take a second look at Market Vectors China ETF (PEK)  as well as ProShares Trust Ultra VIX Short:  UVXY Continue reading