January 4, 2011

ProShares Launches Two Volatility ETFs

New products are first volatility ETFs to market, without potential drawbacks of volatility ETNs

ProShares introduced Tuesday two volatility ETFs—the ProShares VIX Short-Term Futures (VIXY) and the VIX Mid-Term Futures (VIXM)—responding, said ProShares Chairman and CEO Michael Sapir, to the desire among advisors and sophisticated investors to include “volatility exposure within portfolios” but without the credit risk possible with the issuers of existing volatility ETNs.

“Using ETFs that are not debt instruments,” said Sapir (left) in an interview with AdvisorOne, “would be attractive to these investors and advisors.” The new ETFs were listed Tuesday on NYSE Arca.

The VIXY is linked to the performance of the S&P 500 VIX Short-Term Futures Index, which targets a constant, weighted-average term of one month, ProShares noted in its press release announcing the new products, while VIXM is linked to the performance of the S&P 500 VIX Mid-Term Futures Index, which targets a constant, weighted-average term of five months.

“Expected expenses” for the new ETFs are 0.85%, said Sapir, which he noted “compares favorably to other options in the marketplace.” Those other options would be ETNs such as the iPath Short-Term Futures ETN (VXX), or the six volatility related ETNs rolled out in December by VelocityShares.

Sapir emphasized that like other ProShares products, the new ETFs do not constitute a “standalone investment; this is a tool to be looked at from the perspective of the entire portfolio.” He does expect advisors to use the ETFs “as a way to diversify portfolios, as a hedge against equity exposure” for their clients, pointing out that in particular “these indexes tend to have performance that hedge against tail risk.”

Sapir said ProShares also expects that some traders and tactical investors will use the ETFs “as a directional play on volatility,” though he expects that to be less the case in the advisor community.

Sapir said that in developing the new products, ProShares had heard from a “wide range” of financial intermediaries who want to “create more sophisticated portfolios” by including volatility exposure. “We’ve talked to home offices at broker-dealers who are excited” about having such a tool at their disposal in portfolio construction, Sapir said, as well as RIAs.

ProShares has introduced some other ETFs of interest lately, as part of the company’s goal of being the “premier provider of alternative ETFs,” said Sapir. Those other new products include a long-short ETF based on Rob Arnott’s Research Affiliates’ indexing work—the ProShares RAFI US Equity Long/Short Index ETF (RALS)—and the ProShares Credit Suisse 130/30 (CSM), designed to track the Credit Suisse 130/30 Large-Cap Index created by Andrew Lo of MIT.

Sapir characterized “the RAFI product and the Credit Suisse as more buy-and-hold-investments, but everything we’re doing is within the umbrella of alternative products.”

Sapir said he expects there will be more products providing advisors with exposure to volatility, recalling the crisis of 2008-2009, since “every traumatic event changes the way people look at the future; they become reminders of what can occur.”

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