Caution on VIX ETNs

Although useful as hedging tools, the exchange traded notes that track market volatility, the VIX, can potentially burn individual investors.

That’s the conclusion drawn by the WSJ’s Brendan Conway in the article Caveat Buyer: ETNs Tied to VIX.  Conway highlights the use of the S&P 500 VIX Short Term Futures ETN (VXX) by Forward Management, a $5 billion San Francisco money manager.

However, Conway also points out that some ETNs are leveraged or inverse, which means that the funds are designed to deliver multiples or the opposite of the VIX return.  Other concerns – ETNs don’t necessarily track the VIX index exactly and, because they are notes, ETNs are unsecured debt obligations of the bank that issues them.

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