Barclays to tap appetite for volatility deals with ETN+ notes linked to S&P 500 Dynamic Veqtor

By Emma Trincal

New York, Aug. 17 - Barclays Bank plc's upcoming 0% ETN+ S&P 500 Dynamic Veqtor exchange-traded notes due 2020 linked to the S&P 500 Dynamic Veqtor Total Return index will be a complement to the issuer's existing suite of volatility-related notes as demand for volatility-related products is on the rise, said Samson Koo, head of equity structuring at Barclays, during a conference call on Monday.

The volatility-related suite also includes Barclays' iPath S&P 500 VIX Short-Term Futures ETNs and iPath S&P 500 VIX Mid-Term Futures ETNs.

Volatility suite expanding

The return on the new ETNs is linked to the performance of the Veqtor index. This algorithmic index seeks to provide investors with broad equity market exposure with an implied volatility hedge by dynamically allocating a notional investment among three components: equity, volatility and cash, according to a 424B3 filing with the Securities and Exchange Commission.

The Veqtor algorithm is designed to help investors navigate market swings as it increases equity exposure during periods of low market volatility and increases implied volatility exposure during periods of high market volatility, executives at Barclays said during the call.

Under certain exceptional circumstances, the index also incorporates a stop-loss mechanism that shifts the entire value of the index to a cash investment, according to the prospectus.

Veqtor was used as the underlying of a publicly registered note for the first time in March. Since then, Barclays has priced $58 million in 14 deals, according to data compiled by Prospect News.

"Now we're bringing it to the exchange," said Koo. "We believe it is something investors want and that it will grow."

The issuance date is set to be Aug. 31, he said.

Perfect hedge

Some advisers said they like the concept offered by the new Veqtor ETNs because the strategy gives investors access to volatility as an asset class and because it offers a hedging tool given the negative correlation between volatility and equity and the fact that volatility surges in periods of market declines.

"As equity, bonds, commodities go down in price, volatility is now going up. The only thing that maintains a negative correlation is volatility. Basic portfolio construction is managing correlation. If you construct a portfolio today, you really have to use volatility, not as a metric but as an asset class that maintains its consistent inverse correlation to equities," said Matt Medeiros, president and chief executive of the Institute for Wealth Management.

"That's why I think there's going to be a lot more demand for investments using some sort of volatility hedge."

Medeiros said that it has become "a big source of frustration" among financial advisers trying to create a portfolio based on non-correlated asset classes to see their efforts rapidly reverted due to sudden volatility spikes.

He said that asset classes that have been "historically non-correlated" such as oil and stocks or large caps and commodities are now "highly correlated" when there is a sell-off.

"Today, a sell-off is no longer an equity sell-off or a bond sell-off or a commodities sell-off. It's a broad sell-off across all these asset classes," he said.

Medeiros said that he does not know whether he will invest in the Veqtor ETNs.

"I have to look at them," he said. "But we are looking at using volatility as an asset class in our portfolio construction."

Too complex

Other advisers are more skeptical.

The underlying index is a "complex algorithm," said Carl Kunhardt, director of investment management and research at Quest Capital Management.

"I don't like it for the same reason I didn't like it before," he said. "These are complex indexes difficult for clients and advisers to comprehend. I'd find it too time-consuming for me to track it. I'd rather spend my time meeting with clients all day than trying to figure out how this index works."

Passive vs. active

In addition, this type of vehicle, which combines aspects of "passive" and "active" investing styles, represents another drawback for this adviser.

"In putting together a portfolio, my first decision is to choose whether I am going to introduce active management into the portfolio, because with active management comes market risk. When you choose an index, either via an [exchange-traded fund] or an ETN, you've already made the decision that you're going to go passive. So why would I want to pick a passive investment vehicle using an active index? I'm not sure I see the point of introducing active risk by choosing an actively managed index," Kunhardt said.

The issuer plans to apply to list the notes (Cusip: 06740C337) on the NYSE Arca under the symbol "VQT."

Barclays Capital Inc. is the agent.

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