VQT (Dynamic) vs. VQTS (Switch)

By Lawrence G. McMillan

These are two Exchange Traded Notes (ETN’s) that attempt to hedge a long “stock market” portfolio by using a long volatility component.  We have written about VQT before (Volume 21, No. 4), and I often talk about it in my seminars and webinars that discuss volatility trading.  

VQT

VQT is a Barclay’s product that owns the $SPX Total Return Index and also owns VXX (Barclay’s Volatility ETN).  The ratio of the two components depends on an array that utilizes both realized and implied volatility. 

When the market is calm and rising, VQT is composed of 97.5% $SPX and 2.5% VXX.  But when the market is collapsing and highly volatile, VQT is long 60% $SPX and 40% VXX.  In between, there are 15 variations of the percentage holdings, depending on levels of $SPX realized volatility and the trend of $VIX.  There is also a provision that VQT goes to cash when it has had a number of losing days in a row.  

VQT has a strong track record and normally makes quite a bit of money when the stock market crashes or drops dramatically.  It lags behind $SPX when that index is steadily rising, in a low volatility environment.  In my opinion, this is a very good product, and I own it in my long-term accounts, such as IRA’s.

VQT is designed to track the S&P Dynamic VEQTOR Total Return Index.

VQTS

VQTS is something quite different.  It had been suggested to me that VQTS is an “improvement” on VQT.  However, that’s not a good description of it; it’s quite different...  

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