10-Q: VS Trust Reports Mixed Results for Q3 2024 Amidst Volatile Markets

VS Trust's Q3 2024 report reveals a complex financial landscape with varying performance across its -1x Short VIX Futures ETF and 2x Long VIX Futures ETF.

Summary

• VS Trust's quarterly report for the period ending September 30, 2024, shows a mixed performance for its two exchange-traded funds (ETFs).
• The -1x Short VIX Futures ETF (SVIX) experienced a net decrease in net assets resulting from operations of $30.7 million for the quarter and a net increase of $20.8 million for the nine months ended September 30, 2024.
• The 2x Long VIX Futures ETF (UVIX) saw a net decrease in net assets resulting from operations of $6.1 million for the quarter and a net decrease of $62.1 million for the nine months ended September 30, 2024.
• SVIX had net assets of $317.7 million and UVIX had net assets of $167 million as of September 30, 2024.
• Both funds engage in futures contracts and options, with a significant portion of their assets held in short-term investments and cash pledged as collateral.
• The report details the use of leverage and the associated risks, including correlation and compounding risks, which can significantly impact long-term performance.
• The funds are subject to counterparty risk, particularly with over-the-counter (OTC) derivatives, and the report outlines measures taken to mitigate these risks.
• The report also discusses the impact of market volatility, contango, backwardation, and potential economic shocks on the funds' performance.

Sentiment

Score: 4

Explanation: The sentiment is negative due to the reported losses and the inherent risks associated with leveraged and inverse ETFs. While the report is transparent and detailed, the financial results are concerning, and the risks are significant.

Positives

• Both funds have significant assets under management, with SVIX at $317.7 million and UVIX at $167 million.
• The funds actively manage their portfolios, rebalancing daily to maintain exposure to their benchmarks.
• The report details the measures taken to mitigate counterparty risk, including collateral arrangements.
• The funds' use of short-term investments provides a degree of liquidity and stability.

Negatives

• Both funds experienced a net decrease in net assets from operations for the quarter ended September 30, 2024.
• SVIX had a significant negative total return of -43.33% at net asset value for the quarter.
• UVIX also had a negative total return of -14.31% at net asset value for the quarter.
• The use of leverage increases the risk of total loss, even over short periods.
• The funds are subject to market volatility, which can significantly impact their performance.
• The funds are exposed to contango and backwardation risks, which can negatively affect returns.

Risks

• The funds are subject to correlation and compounding risks, which can cause their performance to differ significantly from their benchmarks over time.
• Counterparty risk, particularly with OTC derivatives, poses a threat to the funds' assets.
• The use of leverage increases the risk of total loss, even over short periods.
• Market illiquidity can make it difficult to liquidate positions at desired prices.
• Natural disasters and epidemics can disrupt markets and negatively impact the funds' performance.
• Global economic shocks can quickly render the funds' assumptions and expectations outdated, leading to significant losses.
• The funds are subject to regulatory risks, including changes in rules for derivatives trading.

Future Outlook

The report includes forward-looking statements, which are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. The funds' actual results may differ materially from those expressed in these statements.

Management Comments

• The discussion and analysis that follows may contain statements that relate to future events or future performance.
• None of the Trust, the Sponsor, the Trustee, or the Administrator assumes responsibility for the accuracy or completeness of any forward-looking statements.
• The Funds forward-looking statements are not guarantees of future results and conditions.

Industry Context

This report reflects the challenges and complexities of managing leveraged and inverse ETFs in volatile markets. The performance of these funds is highly dependent on the underlying VIX futures contracts and is subject to various market risks and counterparty risks. The report also highlights the regulatory landscape for derivatives trading, which is constantly evolving.

Comparison to Industry Standards

• The performance of VS Trust's ETFs can be compared to other leveraged and inverse VIX ETFs, such as those offered by ProShares (e.g., UVXY, SVXY).
• The expense ratios of 1.53% for SVIX and 2.14% for UVIX are within the typical range for leveraged and inverse ETFs, but are higher than traditional index-tracking ETFs.
• The use of futures contracts and options is a common strategy for these types of funds, but the specific implementation and risk management practices may vary.
• The report's detailed disclosure of counterparty risk and collateral arrangements is consistent with industry best practices for transparency.
• The funds' daily rebalancing strategy is a standard approach for leveraged and inverse ETFs, but it can lead to higher transaction costs and tracking error.

Stakeholder Impact

• Shareholders of both funds have experienced significant losses during the quarter.
• The funds' performance is highly dependent on market conditions, which can impact shareholder returns.
• The funds' use of leverage and derivatives exposes shareholders to increased risk.
• The funds' daily rebalancing strategy can lead to higher transaction costs, which can impact shareholder returns.

Next Steps

• The funds will continue to rebalance their portfolios daily to maintain exposure to their benchmarks.
• The Sponsor will continue to monitor the creditworthiness of its counterparties.
• The funds will continue to comply with all applicable regulations.
• The Sponsor will continue to provide monthly account statements and quarterly reports to investors.

Key Dates

Keywords

VIX Futures, Leveraged ETFs, Inverse ETFs, Volatility, Derivatives, Futures Contracts, Options, Swaps, Market Risk, Counterparty Risk, Financial Instruments, Short VIX, Long VIX