Credit Suisse&8217;s fifth reverse split of TVIX was March 16th, 2017 with a 10:1 reverse split. Based on the decay rate since that split (-91%/year!) I&8217;m estimating the next TVIX reverse split, number six, will be on February 20th, 2018.
This split will reduce transaction costs by making the bid /ask spread as a percentage of the price smaller (when TVIX is trading around $4 the one cent minimum spread TVIX&8217;s bid / ask spread is effectively a 0.25% transaction charge). It will also likely make TVIX easier to short—a popular activity with any long volatility fund. For information about shorting long volatility funds see &8220;Is Shorting TVIX the Perfect Trade.&8221;
Lacking major volatility spikes the 2X leveraged short term volatility ETPs like VelocityShares&8217; TVIX and ProShares&8217; UVXY need to reverse split at least every year to keep their products in a reasonable trading range. Without market panics, these 2X long funds tend to be ravaged by contango at the rate of around 90% per year. In the past Credit Suisse has allowed TVIX to drop below $1 before implementing reverse splits, but recently that threshold has been raised to around $4 / share.
After a period of reduced erosion in 2014 and 2015 TVIX&8217;s decay rate has returned to the 90%+ per year range. The post &8220;Monthy & Yearly Decay Rates for Long Volatility Funds&8221; shows how decay rates have shifted over time.
|Event||Dates||Split Ratio||Inception / close price right before reverse split (split adjusted)||Months since inception /last split|
|1st Rev. Split||21-Dec-2012||10:1||0.9||24|
|2nd Rev. Split||30-Aug-2013||10:1||1.68||9|
|3rd Rev. Split||23-June-2015||10:1||0.75||22|
|4th Rev. Split||9-August-2016||25:1||0.92||14|
|5th Rev. Split||16-March-2017||10:1||3.84||8|
|6th Rev. Split||13-Feb 2018||10:1||~4||11|
If you hold shares of TVIX before a reverse split there isn&8217;t anything to worry about. The value of your investment stays the same through the reverse split process. You just have 10X fewer shares that are worth 10X more each. If your share holdings are not a multiple of 10, say 43 shares, you will get 4 reverse adjusted shares and a cash payout for the 3 remaining pre-split shares.
If you are short TVIX, same story, no material impact.
For more on TVIX see:
- Is Shorting UVXY, TVIX, or VXX the Perfect Trade?
- How Does TVIX Work?
- Backtests for Popular Long &038; Short Volatility Exchange Traded Products
- When You Think Your Exchange Traded Fund is Broken…
- TVIX Gets a New Lease on Life
Wednesday, December 27th, 2017 |