Toronto-based Horizons ETFs Management (Canada) Inc. is terminating two of its volatility-tracking ETFs after drastic spikes in stock market volatility earlier this year caused significant losses for some investors.
Horizons announced it would terminate BetaPro S&P 500 VIX Short-Term Futures 2X Daily Bull ETF (TSX: HVU) and BetaPro S&P 500 VIX Short-Term Futures Daily Inverse ETF (TSX: HVI) effective at the close of business on June 11.
The decision to terminate the ETFs was prompted in part by erratic activity in the pricing of futures on the Chicago Board Options Exchange’s (CBOE) volatility index (VIX) since early February, which changed the risk profile of the ETFs to be too high for Canadian investors, according to Steve Hawkins, president and co-CEO of Horizons ETFs.
“The level of volatility in the volatility markets really has changed the risk/reward profile of these products,” Hawkins says. “The single day ability for someone to lose all of their money with either of these products now is much more apparent than it ever has been in the past, and we didn’t want to be the ETF provider out there that was giving clients and investors the opportunity to basically lose all of their money in a single day.”
The VIX is a popular measure of the stock market’s expectation of volatility. It rises when investors expect the S&P 500 composite index to be more volatile over the next 30 days, and falls when volatility is expected to recede.
HVU takes a two times long position in VIX futures while HVI takes a short position. In early February, the VIX surged by more than 100% in a matter of hours, which caused a jump in the price of HVU and dramatic losses for HVI. Trading was temporarily halted for both products, which in turn “sparked a lot of anger” among some unitholders who were unable to adjust their positions, according to Hawkins.
Further problems emerged with HVI in late February, when Horizons suspended new subscriptions, stating that it did not expect HVI to be able to meet its current stated investment objective. Subscriptions resumed in mid-March, when Horizons said it would seek to amend HVI’s investment objective from seeking to correspond to one times the inverse of the daily performance of the VIX to one-half times the inverse of the daily performance.
Despite the disclosure available for HVU and HVI, Hawkins says many investors didn’t have a comprehensive understanding of how the products worked. Although the ETFs are designed to be day-trading vehicles, he says some investors were holding them for long periods of time.
“These products are interesting vehicles for a sophisticated investor to get very short-term access to the volatility markets,” Hawkins says. “Many of the people that are trading them are trading them incorrectly.”
Effective immediately, no further direct subscriptions for units of HVU and HVI will be accepted.
Horizons will continue to offer BetaPro S&P 500 VIX Short-Term Futures ETF (TSX: HUV), which offers single-long daily exposure to the VIX index.