Page 39 - Investment Advisor March 2022

Perhaps because it lacked empirical daily disclosures but track the same In that 2011 case, a federal appellate
data about the scope of such inves- underlying index of stocks. court sidestepped the issue by con-
tor harms, the SEC noted the fund On average, the data show that the cluding that the legal issue was not
companies’ concerns but implemented funds not compelled to disclose their “ripe” enough for the court to con-
the “full daily portfolio transparency” portfolio holdings on a daily basis out- sider, in part because the court found
requirement despite those concerns. perform the funds that are compelled that disclosure “produce[d] no eco-
To be sure, many in the industry wel- to disclose “by 1.8 basis points (bps) per nomic harm” to the hedge fund advi-
comed the new SEC rule as it pro- quarter or 7.3 bps per year.” sor. Ultimately, the court declined to
vided clarity in place of the ambiguity While the SEC is unlikely to repeal decide whether the SEC had engaged
and cumbersome approval process that its daily disclosure rule, it is possible in an uncompensated unconstitutional
preceded it. that investors will seek redress in the taking of property.
courts. That is what happened a decade The circumstances are quite different
NEW DATA ago when the SEC first required cer- for owners of ETF index funds com-
This applause, however, may become tain hedge funds to file publicly avail- pelled by the SEC to disclose daily hold-
less enthusiastic in light of the data able reports on Form 13F disclosing ings. The economic harm to investors
recently brought to light. Because some certain holdings. One fund manager appears to be quite real and significant.
ETF index funds are exempt from the sued the SEC, asserting that compel- The $3.9 billion per year estimated in
SEC’s daily disclosure requirement, the ling such disclosure amounted to an Li’s paper may be enough incentive for
study’s author was able to contrast trad- unconstitutional “taking” of private investors to go to court over the issue,
ing by funds that disclose their portfo- property for a public use without pay- which now may be “ripe” enough for
lios daily with funds that do not make ing “just compensation.” courts to consider it.

Beware of VIX ETFs and ETNs

ne of the best performing assets Their longer-term counterparts, the “VIX-linked ETPs have effective-
so far this year have been short- ProShares VIX Mid-Term Futures ETF ly destroyed $12.4 billion in capital
Oterm ETFs and exchange-traded (VIXM) and iPath B S&P 500 VIX Mid- during nearly 12 years since they
notes based on the Cboe Volatility Index Term Futures ETN (VXZ), which have debuted,” he said. “Investors should
(VIX), which rises when volatility in exposure to Cboe Volatility Index futures steer clear.”
the S&P 500 index increases. The index with an average five-month exposure,
represents the market’s real-time expec- didn’t fare as well. They gained between RISKS OF VIX ETFs AND ETNs
tations for the relative strength of near- 5.3% and 5.9% year to date through Jan. Instead of protecting investor assets
term price changes of the S&P 500 index. 27. The S&P 500, during that period, fell against losses, VIX-linked ETPs have,
The exchange-traded products invest in more than 9%, teetering on the edge of overall, added losses to investor port-
futures contracts that track the VIX; correction territory. folios. A primary reason is that these
investors cannot buy the VIX directly. Short- and medium-term ETPs per- investments don’t invest in the actual
As the stock market reversed course formed especially poorly last year, when VIX index but in a futures contract
and traded lower in January, the the S&P 500 soared almost 27%, but based on that index.
ProShares VIX Short-Term Futures posted gains around 10% in 2020 when Because the futures curve is in con-
ETF (VIXY) and the iPath Series B S&P stocks swooned early on when the coro- tango — later-month contracts cost
500 VIX Short-Term Futures ETN from navirus pandemic began to spread. more than current-month contracts —
Barclays (VXX) soared, gaining more Short- and medium-term VIX ETPs investors who roll over their contract
than 30% through Jan. 27. Both track have been on the market for a dozen into the next future month lose money
the VIX futures, not the spot price years, but their total assets today are just on the transaction.
of the VIX index, providing exposure $2.5 billion, despite total net inflows of “Regularly selling current contracts
to a daily rolling long position in the $14.9 billion through Jan. 26, according to low and buying subsequent contracts
first and second month S&P 500 VIX Ben Johnson, director of global exchange- high results in negative roll yield,”
futures contracts. traded fund research for Morningstar. Johnson said.

MARCH 2022 INVESTMENT ADVISOR 37