Credit Suisse announced recently the delisting of ZIV and UGLD, among other ETN. These ETN will continue to trade on the Nasdaq Stock Market up to and including July 2, 2020. The delisting of the ETNs will become effective on July 12, 2020.
We currently employ ZIV in our Maximum Yield Strategy (MYRS) and UGLD in our Leveraged Universal Investment Strategy (3XUIS). We will modify both strategies effective July 1, 2020 as follows:
ZIV – Maximum Yield Strategy (MYRS)
ZIV seeks returns that are -1x the returns of the S&P 500 VIX Mid-Term Futures Index for a single day, so basically a short positions of the month 4-7 of the VIX futures contracts. Here the current holdings as of June 30, 2020:
We will replace ZIV with a short position in VXZ (iPath Series B S&P 500 VIX Mid-Term Futures ETN). VXZ mimics the daily returns of a long position in the month 4-7 of the VIX futures contracts, so in order to replicate an inverse position it is necessary to short the ETN.
Here 5 years chart of ZIV (blue) and XVZ (red), you can see that they are inverse positions:
In comparison to ZIV, VXZ has a much lower daily volume of only 15,000 shares per day, compared to the +100k shares traded daily if ZIV. However we believe that there are sufficient shares to borrow available for a typical retail account size. Shorting VXZ offers the benefit of a lower expense ratio (0.85% vs 1.35% ZIV), which depending on the broker’s fee for shorting will be partially offset.
An potential alternative to shorting VXZ is shorting VIXM (ProShares VIX Mid-Term Futures ETF), which has a similar volume and expense ratio as VXZ, but a worse tracking record. VXN is structured as an ETF, in contrast to VXZ which is structured as an ETN. Depending on broker and plan limitations you might not be able to trade ETNs, so VIXM might be the only alternative.
Subscribers experienced in futures trading can also directly short month 4-7 VIX futures contracts in a similar notional value, these have very high liquidity and lower transaction costs.
Subscribers not able to enter short positions or trade futures will sadly not be able to continue investing in MYRS, as there are no other long ETNS available after the delisting of ZIV.
The overall performance of MYRS with a short VXZ position is similar, if not better than the former version with ZIV, here a 5 years backtest chart after the change:
UGLD – Leveraged Universal Investment Strategy (3XUIS)
UGLD mimics a 3 times daily return of GLD after fees for the leverage. There are no other 3 times leveraged gold ETN available as a direct replacement.
We evaluated a replacement with UGL, ProShares 2 times leveraged gold ETF, but it is structured as a commodity pool, which would cause issues to many US investors, and also has a high expense ratio of 0.85% (while lower than the absolute 1.35% of UGLD).
Instead we recommend to use leverage in a margin account to invest in a 3 times leveraged GLD position, as this is easy to implement (if feasible) and reduces overall transaction cost (even after considering typical borrowing fees).
Subscribers not able to use leverage in their accounts can scale the positions down to match 100% total allocation. Here an example using today’s 3XUIS signals using either GLD, or UGL:
|Ticker||With leverage||Scaled down||Scaled down (UGL)|
The overall performance of 3XUIS with a 3 times leveraged GLD position is similar, if not better than the former version with UGLD, here a 5 years backtest chart after the change:
Portfolios holding MYRS or 3XUIS
All portfolios holding MYRS or 3XUIS will as of today reflect the changes in both strategies, that is, holdings of the the new instruments and due to the leverage and shorting the total allocations might not add up to 100%. We are aware this might not be feasible to implement for some subscribers, so we are currently evaluating to drop MYRS and 3xUIS from some portfolios, or to replace them with easier to implement options.
The sudden delisting of ZIV and UGLD have been received as a sad surprise by the market, and certainly we also miss to important instruments in our toolbox. While in theory shorting VXZ and leveraging GLD the performance of MYRS and 3xUIS is similar or even better, we are aware that this is another hurdle for subscribers with limitations on their retirement accounts.
The important point to take away today is that both ZIV and UGLD will stop trading as of tomorrow, July 2, 2020, and in order to avoid unwelcome surprises due to low volume and higher volatility on the last trading day we strongly recommend to close any position as of today using limit orders and giving them time to fill within a close range.
We hope to receive a vivid feedback to discuss alternatives and a suitable way forward in the portfolios.
Your Logical Invest team,
July 1, 2020