As the ETF space continues to evolve and push into new territory, such as strategy-in-a-box ETFs [1] and more actively managed ETFs [2] (e.g., QAI [3], ALT [4], PQY [5], PQZ [6], GVT [7], PSR [8], RWG [9]), it was only a matter of time before a volatility play was added to the pool of actively managed ETFs.
Credit Direxion [10] with being the first to venture into the realm of actively managed ETFs with a strong volatility component. In a recent SEC filing [11], Direxion unveiled plans to launch an intriguing new ETF under the name of S&P 500 Dynamic VEQTOR Shares. This ETF will seek to track the S&P 500 Dynamic VEQTOR Index [12], which was launched by S&P on November 18, 2009.
So far, so good.
Here is where it gets interesting. The VEQTOR [13] index (and ETF) have three components: equity (S&P 500); volatility (S&P 500 Short-Term VIX Futures Index, aka VXX [14]) and cash. Based upon several rules and formulas, the index attempts to derive – on a daily basis – the ideal target volatility allocation. This is accomplished by evaluating realized volatility [15] and implied volatility [16], determining the implied volatility trend (using 5-day and 20-day IV moving averages) and arriving at a target index volatility allocation based on realized volatility and implied volatility data. Once the target volatility allocation has been determined (the range is from 2.5% to 40.0%), the balance of the index is populated with the S&P 500.
Just to make things interesting, the VEQTOR index also has a stop loss provision which specifies that if aggregate losses during any five day business period are 2% or higher, the index will move into a 100% cash position.
When the VEQTOR ETF is launched, I will have a lot more to say about this fascinating product. In the meantime, those interested in additional information on the VEQTOR index and ETF should try:
For more on related subjects, readers are encouraged to check out:
Disclosure(s): none
Links:
[1] http://vixandmore.blogspot.com/search/label/Strategy-in-a-Box ETFs
[2] http://vixandmore.blogspot.com/search/label/actively managed ETFs
[3] http://vixandmore.blogspot.com/search/label/QAI
[4] http://vixandmore.blogspot.com/search/label/ALT
[5] http://vixandmore.blogspot.com/search/label/PQY
[6] http://vixandmore.blogspot.com/search/label/PQZ
[7] http://vixandmore.blogspot.com/search/label/GVT
[8] http://vixandmore.blogspot.com/search/label/PSR
[9] http://vixandmore.blogspot.com/search/label/RWG
[10] http://vixandmore.blogspot.com/search/label/Direxion
[11] http://www.sec.gov/Archives/edgar/data/1496646/000089418910002506/ds-etf_s1.htm
[12] http://www.standardandpoors.com/indices/sp-500-dynamic-veqtor-index/en/us/?indexId=spsvixevl-usd----t-us-l--
[13] http://vixandmore.blogspot.com/search/label/VEQTOR
[14] http://vixandmore.blogspot.com/search/label/VXX
[15] http://vixandmore.blogspot.com/search/label/realized volatility
[16] http://vixandmore.blogspot.com/search/label/implied volatility
[17] http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline; filename=Factsheet_SP_500_Dynamic_VEQTOR_Index.pdf&blobheadername2=Content-Disposition&blobheadervalue1=applicatio
[18] http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline; filename=Methodology_SP_500_Dynamic_VEQTOR_Web.pdf&blobheadername2=Content-Disposition&blobheadervalue1=applicatio
[19] http://www.sec.gov/Archives/edgar/data/1496646/000089418910002506/ds-etf_s1.htm
[20] http://www.sec.gov/Archives/edgar/data/1496646/000089418910002506/ds-etf_s1.htm
[21] http://vixandmore.blogspot.com/2009/10/chart-of-week-strategy-in-box-etfs.html
[22] http://vixandmore.blogspot.com/2009/10/diving-little-deeper-into-strategy-in.html