First Trust, the Wheaton, Ill.-based fund provider known for its
niche strategies that include an Internet fund, today rolled
out an ETF designed to help investors hedge tail risk in an S&P
The First Trust CBOE VIX Tail Hedge Index Fund (NYSEArca:VIXH),
which will track the CBOE S&P VIX Tail Hedge Index, will
consist of equities from the S&P 500 universe. It will come
with an annual expense ratio of 0.60 percent, according to the
latest regulatory paperwork detailing the fund.
It will include a "variable option overlay" consisting of
one-month call options on the VIX Index in a strategy designed
solely to profit from sudden volatility spikes, while at the same
time offsetting losses stocks typically incur from such events.
The fund's tail-hedging strategy, in this context, is an attempt
to protect a portfolio against sudden, unexpected market action
that usually leads to increased volatility, the company said in the
filing. To do so, First Trust will look to the CBOE Volatility
Index, or VIX-which tracks near-term future volatility-and
determine the extent of the fund's overlay based on the level of
The fund's theme is timely to the extent that volatility remains
a big concern among investors, particularly in how it relates to
Europe's sovereign debt crisis playing out. The current period of
recurring spikes in volatility has coincided with the rollout of a
number of strategies that strive to ride the volatility wave while
Funds like Invesco PowerShares' S&P 500 Low Volatility ETF
(NYSEArca:SPLV)-which isolates the 100
least-market-movement-sensitive stocks in the S&P 500
Index-offer different ways to express views on the volatility
theme, and have resonated with investors. SPLV was launched in May
2011 and has gathered about $2.36 billion, according to data
compiled by IndexUniverse.
iPath and Etracs are also among the providers in the
volatility-related space, each having an extensive roster of ETNs
that focus on volatility and the S&P 500. The biggest VIX ETN
of all, the iPath S&P 500 VIX Short-Term Futures ETN
(NYSEArca:VXX), has more than $2 billion in assets.
First Trust's ETF, VIXH, plans to own all securities included in
the index, and it may also employ an options overlay strategy,
which would enable investors to choose whether to receive a
security at a predetermined price and time, the company added.
The options overlay is the protecting feature for times of
volatile market action. The possible use of derivatives was in
the strategy was noted as a potential source of risk for investors,
the filing said.
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