Chapter 6

Volatility-Related Exchange-Traded Notes

The iShares division of Barclays Bank introduced VIX-related exchange-traded notes in early 2009. One product was based on exposure to shorter-term VIX futures, with the other targeting performance of intermediate-term VIX futures contracts. Before jumping into the specifics of these two products, we offer a quick note on what exchange-traded notes are and how they differ from exchange-traded funds. After covering the specifics of both the iShares ETNs, there is a quick comparison of the two as well as a look at how they perform relative to the S&P 500 index.

In addition, there are other publicly exchange-traded securities basing performance off of the VIX. First, Barclays also has introduced an inverse ETF based on the same index as one of its ETN products. Also, there is a VIX-based exchange-traded fund listed on the London Stock Exchange, but it trades in dollars.

WHAT ARE EXCHANGE-TRADED NOTES?

An exchange-traded note (ETN) is a debt security that is backed by the credit rating of the issuer. The goal of an ETN is to replicate an investment strategy or performance of another investment vehicle. Exchange-traded notes trade in the same manner at exchange-traded funds (ETF) but have a slightly different structure. Again, ETNs are debt securities that attempt to replicate a market index or particular strategy. Barclays Bank has issued a variety of ETN products that replicate anything from investing in commodity products to the ...

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