Thursday, July 07, 2011

Futures ETNs Have No Future With VZZ

One of my previous employers, Barclays, had to learn the hard way that there are limits to financial innovations.  The firm had to redeem an iPath ETN based on index futures because its market price fell below a predetermined share redemption barrier.  The thing about constructing a passive note around futures contracts is that they have to be constantly refreshed to keep the note's holdings consistent with its prospectus.  Equity and bond ETFs need refreshing too, but futures notes require leverage, and that's what kills them. 

The note's symbol VZZ is appropriate for the fizzing sound this product made as its price declined.  It also represents the sound escaping the lips of an investor who gets increasingly angry watching this product's performance.  The good news is that ticker VZZ will soon be available for use.  Perhaps another enterprising asset management firm with know-it-all quants will come up with a snazzy new product that will lose money.