C-Tracks Citi Volatility Index (NYSEMKT:CVOL)

CAPS Rating: 1 out of 5


Player Avatar bbmaven (100.00) Submitted: 1/10/2013 3:58:18 PM : Underperform Start Price: $24.50 CVOL Score: +17.58

The volatility ETF's or ETN's (TVIX, TVIZ, VXX, UVXY, CVOL, VZZB and some others) are based on VIX futures - some short term, some longer term. When volatility is high, they will spike. However, that averages around 10% of the time over the course of a year. When volatility is low, it costs the funds a great deal to continue to roll both the short term and longer term futures. When the longer term futures reflect more volatility than the shorter term futures (which is true about 90% of the time, resulting phenomenon is called contango - CVOL will go down even if the vix stays static. The reverse is called backwardation - but is usually short lived.

In essence, each of these as long term investments are horrible - they WILL go to zero eventually. In fact, they are designed to do so. They are the safest short on the planet except for one thing - when the spikes occur, it is tough to maintain the shorts as the shares become extremely difficult to borrow. If one is over allocated, the margin requirements become severe. And there is a good chance that one's short can get closed out at the worst possible time.

This is not a problem in the CAPS game. Each of these will go down in the long term - GUARANTEED. When ETF's and ETN's get down into single digits, they often do a reverse split to continue trading. CVOL did a 1:10 reverse split on Jan 2, 2013 and I expect that it will do another one in the next 12-18 months.

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