Overview of Volatility Linked Indices

Volatility Linked Futures Indices

Volatility Linked Exchange Traded Notes and Exchange Traded Funds (collectively Exchange Traded Products or ETPs) offer exposure to a benchmark that focuses on a specific maturity. There are several Volatility Linked Indices, but the majority of ETPs are based on either a short-term or mid-term index.

Short-Term Volatility Linked Indices

Volatility Linked Short Term Futures Indices generally target a weighted average futures maturity of one month. Most of these indices achieve a consistent maturity of one month through holding positions in the front two month standard VIX futures contracts. An example of this is the S&P 500 VIX Short-Term FuturesTM Index Total Return. There is also are exchange traded products that give holders exposure to an index based on VSTOXX futures with the underlying index being the front two month VSTOXX futures contracts. In both cases the consistent maturity is maintained through daily rolling of positions from the first to the second month.

The table below shows the weightings of November and December VIX futures contracts on October 30, 2017 and October 31, 2017. Note that on the 30th the index offers exposure equal to 53.44% November VIX futures and 46.66% December VIX futures. The following day the weightings are 48.08% in November VIX futures and 51.92% in December VIX futures. This type of rolling occurs on a daily basis and when the near dated contract is at a premium to the farther dated contract the result is the strategy selling shorter dated futures at a lower price than the price paid for the farther dated contract.

Rolling Positions in the Short-Term Volatility Linked Index

Data Source: S&P Dow Jones Indices LLC, subject to change.

This trading activity is the source of what is commonly referred to as the 'negative roll yield' that impacts the performance of volatility linked ETPs that give holders long exposure to VIX futures. The performance table below shows the monthly performance for one of the long short term volatility linked futures indices. Note the performance below will differ from the ETPs that follow the index as the ETP performance will include a management fee.

Monthly Performance for the S&P 500 VIX Short-Term FuturesTM Index Total Return1

Data Source: Bloomberg

There are funds available in the United States that offer exposure to an index that holds Euro Stoxx 50® Volatility (VSTOXX®) futures. This index experiences the same roll yield issues as VIX related volatility linked ETPs. The performance table below shows the monthly returns for the VSTOXX Short-Term Futures Investable Index. As with the previous table, the performance below will differ from the ETPs that follow the index as the ETP performance will include a management fee.

Monthly Performance for VSTOXX Short-Term Futures Investable Index

Data Source: Bloomberg

Mid-Term Volatility Linked Indices

Volatility Linked Mid-Term Indices generally target a weighted average futures maturity of five months. In order to maintain a consistent maturity of five months these indices will hold positions in the fourth, fifth, sixth, and seventh month VIX futures contracts.

The table below shows the positions held by the S&P 500 VIX Mid-Term FuturesTM Index Total Return on October 30, 2017 and October 31, 2017. Each day some of the fourth, fifth, and sixth month futures are sold and the farther dated, seventh month contract is purchased.

Rolling Positions in the Mid-Term Volatility Linked Index1

Data Source: S&P Dow Jones Indices LLC, subject to change.

There is a roll yield associated with the mid-term indexes, just like there is with the short-term index. However, often there is less of a price difference when comparing the farther dated contracts with each other. Due to the smaller price difference as well as the rolling transactions being smaller in size, the negative roll impact is lower for a mid-term futures index. Note the performance below will differ from the ETPs that follow the index as the ETP performance will include a management fee.

Monthly Performance for the S&P 500 VIX Mid-Term FuturesTM Index Total Return


More information about the S&P 500® VIX Short-Term FuturesTM Index may be found at: https://us.spindices.com/indices/strategy/sp-500-vix-short-term-index-mcap

More information about the S&P 500® VIX Mid-Term FuturesTM Index may be found at: https://us.spindices.com/indices/strategy/sp-500-vix-mid-term-futures-index

More information about the Euro Stoxx 50® Volatility (VSTOXX®) Short-Term Futures Index may be found at: https://www.stoxx.com/index-details?symbol=VST1MT

1Pre-inception period: Index Base Date is December 2005. Index Live Date is January 2009. Historical and hypothetical/simulated performance is not indicative of future performance.

Investments in ETPs involve risk, including the possible loss of principal, and are not appropriate for all investors. Non-traditional ETPs, including leveraged and inverse ETPs, pose additional risks and can result in magnified gains or losses in an investment. Specific risks are outlined in the fund prospectus and may include concentration risk, correlation risk, counterparty risk, credit risk, market risk, interest rate risk, volatility risk, tracking error risk, among others. Investors should consult with their tax advisors to determine how the profit and loss on any particular investment strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations. The information in this program is provided for general education and information purposes only. No statement within this program should be construed as a recommendation to buy or sell a security or to provide investment advice.

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