UBS to redeem 12 series of ETracs S&P 500 VIX Futures due to crowded market, weak sales

By Emma Trincal

New York, Aug. 31 - UBS AG, London Branch will redeem 12 series of outstanding ETracs exchange-traded notes in full on Sept. 12, according to a company news release.

The 12 series are all based on futures contracts on the VIX index. Six of the 12 ETracs are long ETNs linked to the daily performance of a particular index in the S&P 500 VIX Futures Index Series minus an investor fee.

Each of the six short ETNs provides an inverse daily performance of the same indexes, also reduced by investor fees.

The notes priced in September 2011, and Sept. 12 is when each series first becomes redeemable.

The following securities are affected:

• ETracs Daily Short 1-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A873);

• ETracs Daily Short 2-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A865);

• ETracs Daily Short 3-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A857);

• ETracs Daily Short 4-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A840);

• ETracs Daily Short 5-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A832);

• ETracs Daily Short 6-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A824);

• ETracs 1-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A204);

• ETracs 2-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A303);

• ETracs 3-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A402);

• ETracs 4-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A501);

• ETracs 5-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A600); and

• ETracs 6-Month S&P 500 VIX Futures ETNs due Sept. 6, 2041 (Cusip: 90268A709.

Tough to sell

"They haven't sold a lot. With the expenses involved, it probably wasn't worth keeping them," a source familiar with the situation said.

"There were six shorts that did extremely well. The six longs obviously did not."

The VIX index lost roughly 45% since the inception of the ETNs, a year ago.

As an example, the ETracs Daily Short 1-month rose by 84% over the past year, while the ETracs Daily Long 1-month plunged by 72 ½% during the same time.

The 6-Month Short Etracs are up 16%, but the 6-Month Long product has lost 29%.

"It is not related to performance. All the shorts did extremely well," the source said.

"It's just that there are a lot of VIX products in this market. The demand wasn't there."

Each Index underlying the long ETNs is a total return index and is composed of futures contracts on the VIX index having a constant weighted average maturity ranging from one month to six months, depending on the series of the ETNs purchased, plus an interest component linked to the 91-day Treasury Bill rate.

The call settlement amount will be the current principal amount as of Sept. 7.

The current principal amount of each note was $100 on the pricing date. On each subsequent day, the current principal amount equals the current principal amount on the previous day minus the index return on that day minus a tracking fee minus an event risk weekly hedge cost.

By the book

"They announced that the notes were redeemed, but really it's not the investors putting their notes to the issuer. It's UBS calling the notes as they are allowed to do so in the prospectus," a market insider said.

"These things are not unusual. Usually it's when the notional is so small, it becomes hard to manage it, especially with the inverse ETNs, so I guess it may not make sense at this point to keep the notes outstanding.

"It doesn't necessarily mean they can't sell. Sometimes they call it because it's more efficient to issue new ones. It's more likely that they're doing it for efficiency," the insider added.

An industry source agreed that the issuer was simply redeeming the ETNs according to the terms.

"It's not a tender offer or anything," he said.

"They're paying you not exactly the face amount, but what they call a current principal amount based on a formula expressed in the prospectus involving the reset factor, the tracking fee.

"There's no way to tell how much is outstanding. My take is that they may want to replace it with similar products. Maybe they have something up their sleeves," he noted.

"I don't think it has anything to do with performance. If there's a particular reason for this, it would be because it's costing them. But I don't know how much it would be costing them. They may want to replace it with something that could generate a higher fee, a higher tracking fee. That's a possibility but who knows?"

But the main factor may simply be that the ETN market for volatility-based products - long, short or leveraged - is simply too crowded.

"There are a lot of VIX ETNs out there. Barclays has tons of them and you have the Credit Suisse's Velocity products," the source stated.

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