(This article is sponsored by J. P. Morgan.)
J.P. Morgan has launched an exchange-traded note (ETN) designed to help investors efficiently implement a “short volatility” strategy. By utilizing this ETN, investors may more efficiently take advantage of periods of low market turbulence while attempting to manage the inherent risks associated with potential spikes in volatility. The latest innovative design features integrated into the ETN’s construction attempts to enhance the investor experience by addressing some of the challenges previously encountered with these types of products. The Inverse VIX® Short-Term Futures ETN began trading on March 20, 2025 on NYSE Arca under the ticker “VYLD” and aims to give short exposure to VIX® futures contracts.
Providing short exposure to VIX® futures contracts is not an altogether new idea; however, ETNs with the similar objectives have previously been withdrawn due to performance deterioration when market volatility spiked, causing the value of short positions to fall.
Nevertheless, in recent years, there has been considerable interest from clients in strategies that involve selling volatility. This interest has intensified over the past three to five years as investors seek to tap into an alternative source of return. Strategies like call-overwriting, put writing, or buffering have gained popularity as a way to potentially add yield to an equity allocation, which can be particularly effective during periods of market calm. J.P. Morgan believes that their design refinement effectively addresses an issue found in short volatility ETNs. This refinement is based on the insight that VIX itself isn’t an asset, but rather an indicator of how equity markets move on a daily basis. Consequently, the ETN scales exposure daily so that a 1 point move in the value of the reference VIX® futures contracts translates to a 1% move in the value of the ETN before fees and the return on cash.
If the S&P 500 increases from 4,000 to 5,000, most people would describe it as a 25% increase. However, when the VIX moves from 40 to 50, given that these values are already percentages, it’s more accurate to state that it has increased by 10 points. Early ETNs were designed to scale their exposure so the ETNs would change by 25%. This works well when volatility is low or declining. However, that convention can be exposed to significant risk should market volatility increase. “With early ETNs, when volatility rose from the mid-teens to the high 20s, these strategies lost most of their value overnight,” added David Rademeyer, Head of Americas Equity Structuring. “These early ETNs viewed volatility as having doubled, even though it had only risen by 15 points.”
With this launch, J.P. Morgan aims to reintroduce pure volatility exposure within the ETN product, while ensuring the design more accurately represents the true nature of the VIX. The firm’s new ETN aims to provide exposure to the daily returns of the S&P 500 VIX® Short-Term Futures Points-Change Inverse Daily Index TR (the “Index”). If the basket of VIX® futures increases from 10 to 15, i.e., by five points, the ETN should lose 5% before fees and the return on cash.
Rademeyer said S&P Dow Jones has backtested the Index, utilizing over 18 years of VIX® futures historical data, to determine how the new strategy would have performed.
“The strategy would have generated similar returns to the last few remaining VIX products in the market, but with significantly less drawdowns during technical corrections,” Rademeyer added. “When flash crashes happen out of the blue, we believe our ETN construction is more robust.”
Brandon Igyarto, Head of Americas Structured Investment Distributor Marketing (SIDM), explained that the new ETN can serve as a replacement for existing short VIX standalone products, offering the added advantage of reduced volatility due to its more balanced exposure to volatility. Alternatively, it can be used alongside long-term equity portfolios, where there is an increasing focus on non-traditional sources of return. Rademeyer agreed that investors may use the new ETN in conjunction with their core equity exposure.
The short volatility strategy will also become more accessible to smaller institutional investors who may not be able to trade futures, as well as individual investors who value the ability to trade in and out of their exposure to the note as if it was a stock.
Conclusion
By addressing past structural issues J.P. Morgan’s Inverse VIX® Short-Term Futures ETN has been designed to offer a more accurate reflection of market movements, scaling exposure based on point changes. This refined design aims to reduce risks associated with volatility spikes, making it accessible to a wide range of investors. The new ETN provides an option for those seeking to engage with volatility trends while maintaining a balanced risk profile.
Investors may access the final pricing supplement dated March 19, 2025 on the SEC website at www.sec.gov (or if such address has changed, by reviewing J.P. Morgan’s filings for the relevant date on the SEC website): https://www.sec.gov/Archives/edgar/data/19617/000121390025025165/ea0235000-01_424b2.htm
Investors should consult with their brokers or financial advisors when making an investment decision and actively manage and monitor their investments in the Inverse VIX® Short-Term Futures ETN (which we refer to as the “ETN”). Investing in the ETN involves a number of risks, including:
- The ETN differs from conventional debt securities and may not return any of the investors’ initial investment.
- The ETN may not be suitable for all investors and should only be purchased by investors with the sophistication and knowledge necessary to understand the risks, and potential consequences of investing in the ETN, including the risks inherent in the Index, the underlying VIX® futures contracts and short investments in volatility as an asset class generally.
- The ETN is subject to daily deduction of an investor fee.
- The ETN is subject to the credit risks of J.P. Morgan.
- Holders of the ETN may be subject to losses if JPMorgan Chase & Co. were to enter into a resolution.
- J.P. Morgan may, in its sole discretion, elect to redeem the ETN in whole or in part on any business day after March 21, 2025.
- Investing in the ETN is not equivalent to taking a long position directly in the Index or taking a short position directly in the underlying VIX® futures contracts or the Cboe Volatility Index®.
- The ETN does not provide direct short exposure to the Cboe Volatility Index® or the daily “percentage-change” return from the underlying VIX® futures contracts.
- The investors in the ETN do not have any ownership interests or rights with respect to the assets included in the Index, the underlying VIX® future contracts, the Cboe Volatility Index® or the S&P 500® Index.
- The ETN may not have an active trading market and may not continue to be listed over their term.
- The intraday or closing intrinsic value of the ETN is not the same as the closing price or any other trading price of the ETN in the secondary market. The trading price of the ETN in any secondary market may differ significantly from the intraday or closing intrinsic value of the ETN.
- The liquidity of the market for the ETN may vary materially over time, including as a result of any decision of J.P. Morgan to issue, stop issuing or resume issuing additional ETN.
- The issuer’s obligation to repurchase the ETN is on a weekly basis and is subject to restrictions on substantial minimum repurchase size unless waived or reduced.
- Investors will not know how much they will receive upon early repurchase at the time that investors elect the issuer repurchase their ETN. Early repurchase will be subject to a repurchase fee unless waived by J.P. Morgan.
- The performance of the Index and the value of the ETN may be affected, perhaps significantly, by an increase in market volatility, which may happen suddenly.
- Roll costs when the underlying VIX® futures contracts are in backwardation or reduced roll yields when the underlying VIX® futures contracts are in contango will adversely affect the level of the Index and the value of the ETN.
- The Index may be adversely affected by a “volatility drag” effect.
- The Index provides short exposure to the daily “points-change” return of the underlying VIX® futures contracts.
- The ETN is not linked to the options used to calculate the Cboe Volatility Index®, to the actual volatility of the S&P 500® Index or to the equity securities included in the S&P 500® Index.
- The Index has a limited operating history and may perform in unanticipated ways.
- Hypothetical back-tested data relating to the Index do not represent actual historical data and are subject to inherent limitations.
- The Index is subject to significant risks associated with the underlying VIX® futures contracts.
- Concentration risks associated with the Index may adversely affect the value of the ETN.
- Suspension or disruptions of market trading in the underlying VIX® futures contracts may adversely affect the value of the ETN.
- The official settlement price and intraday trading prices of the underlying VIX® futures contracts may not be readily available.
- An increase in the margin requirements for the underlying VIX® futures contracts may adversely affect the level of the Index.
- The ETN is not regulated by the Commodity Futures Trading Commission.
- The Index may in the future include a futures contract that is not traded on regulated futures exchanges.
- Changes in Secured Overnight Financing Rate (“SOFR”) may affect the level of the Index and the return of the ETN.
- SOFR will be affected by a number of factors and may be volatile.
- The SOFR Administrator may make changes that could adversely affect the level of SOFR or discontinue SOFR and has no obligation to consider the investors’ interest in doing so.
- Potential Conflicts of Interest: J.P. Morgan and/or its affiliates act as the issuer and the calculation agent for the ETN, coordinated with the index sponsor in the development of the Index, and hedge our obligations under the ETN.
The risks identified above are not exhaustive. Investors should also review carefully the related “Risk Factors” section of the relevant pricing supplement.
