How does Barclays make money on VXXB?
Barclays collects a daily investor fee on VXXB’s assets—on an annualized basis it adds up to 0.89% per year. With current assets at $1.15 billion this fee totals around $10 million per year. That’s certainly enough to cover Barclays’ costs and be profitable. But even if it was all profit it would be a tiny 0.1% percent of Barclays’ overall net income— which was $10.5 billion in 2012.
From a public relations standpoint, VXX is a disaster. It’s frequently vilified by industry analysts and resides on multiple Worst ETF Ever lists. You’d think Barclays would terminate a headache like this or let it fade away, but they haven’t done that even though 5 reverse splits—which suggests that Barclays is making more than $10 million a year with the fund.
Unlike an Exchange Traded Fund (ETF), VXXB’s Exchange Traded Note structure does not require Barclays to specify what they are doing with the cash it receives for creating shares. The note is carried as senior debt on Barclays’ balance sheet but they don’t pay out any interest on this debt. Instead, they promise to redeem shares that the APs return to them based on the value of VXXB’s index—an index that’s headed for zero.
If Barclays wanted to fully hedge their liabilities they could hold VIX futures in the amounts specified by the index, but they almost certainly don’t because there are cheaper ways (e.g., OTC swaps) to accomplish that hedge. In fact, it seems possible that Barclays might assume some risk and not fully hedge their VXXB position. According to ETF.com
’s ETF Fund Flows tool, VXX’s net inflows were at least $5.99 billion since its inception in 2009. At least $4.8 billion dollars of that asset value was lost by investors and an equivalent amount by Barclays if they were hedged at 100%. If they were hedged at say 90% they would have cleared a cool $480 million over the last 4 years in addition to their investor fees. Barclay’s affection for VXX might be understandable after all.