New ETF Adds Insurance to S&P 500

by Kyle Woodley | September 4, 2012 1:03 pm

August ended with a thud for new exchange-traded funds, with last week’s sole launch marking just the sixth new exchange-traded product to go live in the month.

But that ETF was a doozy.

The First Trust CBOE S&P 500 VIX Tail Hedge Fund (NYSE:VIXH[1]) provides investors with exposure to the S&P 500, but uses volatility to hedge that exposure by going long one-month call options on the VIX. In short, VIXH gives you broad equity exposure with a little bit of downside insurance.

Naturally, then, top holdings should look familiar: Apple (NASDAQ:AAPL[2]) is on top at a 4.64% weighting, followed by Exxon Mobil (NYSE:XOM[3]), IBM (NYSE:IBM[4]), Microsoft (NASDAQ:MSFT[5]) and Chevron (NYSE:CVX[6]).

At a glance, VIXH should show its value in down times, as the “insurance” call options are a play on the VIX’s tendency to rise during market declines (especially steep ones). However, the fund essentially will be a poor man’s S&P 500 fund in flat or up markets, as VIX call options likely will suffer, taking away from the fund’s overall performance.

The issue would be further exacerbated by what you lose in expenses. VIXH charges 0.6% in fees, a stark contrast to the 0.09% charged by the SPDR S&P 500 ETF (NYSE:SPY[7]) and similarly low fees of other index-tracking funds.

A couple weeks ago, we saw two new dividend funds and two new emerging-market funds come to market[8]. In all, 140 new funds have come out so far in 2012, according to[9].

Kyle Woodley[10] is the assistant editor of[11]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley[12].

  1. VIXH:
  2. AAPL:
  3. XOM:
  4. IBM:
  5. MSFT:
  6. CVX:
  7. SPY:
  8. two new dividend funds and two new emerging-market funds come to market:
  10. Kyle Woodley:
  12. @KyleWoodley:!/kylewoodley

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