Bloomberg News

Barclays Gas ETN Sinks as Credit Suisse VIX Note Crashes

March 27, 2012

A Barclays Plc bank branch in London. Photographer: Simon Dawson/Bloomberg

A Barclays Plc bank branch in London. Photographer: Simon Dawson/Bloomberg

A Barclays Plc (BARC) exchange-traded note that traded 134 percent above the value of the natural-gas index it’s tied to lost 47 percent of the premium in three days as investors exit funds that diverge from underlying assets.

The iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (GAZ:US) has plunged 29 percent since March 21 as its benchmark index decreased 6.5 percent, according to data compiled by Bloomberg. Barclays suspended issuance of new shares in August 2009, which may cause the notes “to trade at a premium or discount in relation to their indicative value,” the bank said in a statement at the time. The ETN fell 2.7 percent today to $3.66.

The note, which was trading at the highest premium to its index among more than 1,000 U.S. exchange-traded products yesterday, dropped as another ETN (TVIX:US) sold by Credit Suisse Group AG (CSGN) and linked to a measure of stock-market volatility fell 52 percent in the past four trading sessions.

“Everyone’s late on the first trade but are starting to look for what else is out there that could be dangerous,” said Peter Tchir, founder of TF Market Advisors in New York. “It would make sense that over the weekend people were running numbers and we’re looking at all ETNs and ETFs trading over a premium and are recommending selling those now.”

Kristin Friel, a spokeswoman for Barclays in New York, declined to comment.

Rising Volatility

Investors who bought the Credit Suisse VelocityShares Daily 2x VIX Short-Term ETN to profit from rising volatility lost more than $253 million when it dropped about 50 percent over two days. The plunge began even before Credit Suisse announced on March 22 that it would resume issuing shares.

The Zurich-based bank had stopped creating new shares of the ETN on Feb. 21, unhinging the note’s price from the index and leading to a premium over the indicative value that peaked at 89 percent on March 21. The VIX note gained 19 percent today to $6.97.

The Barclays ETN, which traded at more than a 100 percent premium for almost three weeks starting March 5, began dropping on March 20, the day after its price climbed to 134 percent more than its index. It traded at a 53 percent premium to the index today.

Exchange-traded products have come under scrutiny by regulators and lawmakers during the past three years.

Flash Crash

The SEC examined whether they contributed to equity-market volatility in 2010 and the 8.6 percent intraday plunge in the Standard & Poor’s 500 stock index on May 6, 2010, known as the “flash crash.” The International Monetary Fund said last year that European exchange-traded funds that generate returns through derivatives, so-called “synthetic” ETFs, add a layer of complexity and risk to financial markets.

ETNs are unsecured bank debt backed by their issuer’s credit, unlike exchange-traded funds, which hold assets. Banks create and redeem shares of ETNs based on the level of demand for the securities. That demand typically doesn’t affect the price since the ETNs track the performance of an index.

To contact the reporters on this story: Matt Robinson in New York at mrobinson55@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net;


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Companies Mentioned

  • GAZ
    (iPath Bloomberg Natural Gas Subindex Total Return ETN)
    • $2.69 USD
    • -0.15
    • -5.58%
  • TVIX
    (VelocityShares Daily 2x VIX Short Term ETN)
    • $2.42 USD
    • -0.07
    • -2.89%
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