VelocityShares Daily 2x VIX Short Term ETN (NASDAQ:TVIX)

CAPS Rating: 1 out of 5

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Player Avatar bbmaven (100.00) Submitted: 6/6/2014 12:44:00 PM : Underperform Start Price: $3.79 TVIX Score: +19.88

The volatility ETF's or ETN's (TVIX, TVIZ, VXX, UVXY, CVOL, VXZ, VIIX, VIXM, VIXY, XVZ 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 and usually doesn't last long. 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, the resulting phenomenon is called contango - TVIX will go down even if the vix stays static. The reverse is called backwardation - but is also usually short lived.

In essence, each of these as long term investments are horrible - they WILL go to zero eventually. In fact, their design almost dictates that they do so. They are the safest short on the planet except for one thing - when the spikes in volatility 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. TVIX did its last reverse split on December 21, 2012 issuing 10 shares for each one outstanding when it got down below $1.00 and then did another 1:10 reverse split on August 30, 2013. I anticipate there will be another such reverse split in the next few months.

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