VXUP: Distribution Dates, De Facto Dividends, and More

How the distribution date impacts the AccuShares Spot CBOE VIX Fund Up Shares (VXUP) tracking cycle

Jun 1, 2015 at 9:24 AM
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Happy Monday! If you were waiting all weekend for a good Twitter discussion about whether AccuShares Spot CBOE VIX Fund Up Shares (VXUP) will morph from tracking CBOE Volatility Index (VIX) futures early in the "cycle" to tracking closer to VIX itself later in the cycle, well … you're in luck! 

I don't at all disagree. My only point is that it will also track VIX itself as it nears the distribution date, peaking at Day 0 (the 15th). Anyway, here's what Eli has to say in his piece: 

"… [Y]ou are probably asking yourself, what about the Distribution Date and its implications? After all, the Distribution Date of VXUP usually falls near but not on the expiration date of the future and how is this analysis of arbitrage involving futures whose life spans several Distribution Dates relevant? The crucial point to understand here is that the Regular Distribution is a non-event value-wise for a VXUP position just as a split or a dividend are for a position in a regular stock. A split in the value of a stock does not change the value of the position held. As for a dividend distribution, the price of the stock goes down by the dividend amount on the ex-dividend day but the value of the whole position consisting of stock plus a cash dividend remains the same. Say that you know that the next day a stock is going to go ex-dividend. You also know exactly what the dividend will be. If you buy at the close extra stock with your anticipated cash dividend, your stock position will remain the same." 

OK, that's all true. The distribution is a de facto dividend. If you buy VXUP "Distribution On" on the 15th, you are doing the same exact thing as if you buy it the next day at the same price as the day before, minus the accumulated distribution.  There's no value added or subtracted by the mere fact that they're paying the distribution.

But that's not really the issue. Rather, it's whether the imminence of the distribution causes VXUP to track VIX itself. Which brings us to Eli's next graph: 

"Holders of VXUP can do exactly that at the close of each Distribution Date. Because the rules of the Regular Distribution are fixed and known in advance, an investor can anticipate exactly how much cash he will receive (if at all) and purchase additional VXUP in that amount."

And that's my only real point. He anticipates that exact amount by knowing the distribution amount in the "bank," plus the move in that last day. And that last day move is entirely the move in VIX itself, as best I understand it. So, the move in VXUP on Day 0 should achieve maximum correlation with VIX itself. He goes on: 

"In this way, the Distribution Dates become non-issues in relation to arbitraging VXUP and the VIX futures (the only risk being lack of liquidity resulting in large bid-ask spreads)."

That's likely true, too. I would suggest the real issue is none of this is mutually exclusive. 

Or maybe that's the real non-issue. This is giving me a headache, and we'll have a better idea when we actually see it. Maybe VXUP gets huge someday and it starts dragging around VIX futures? I doubt it, but who knows?

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.



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