First Trust Readies Tail Hedge ETF

Aug 29 2012 | 12:33pm ET

First Trust Advisors is bringing the black swan to the New York Stock Exchange.

The exchange-traded fund specialist will offer a volatility tail-risk ETF tomorrow. The First Trust CBOE S&P 500 VIX Tail Hedge Fund will invest in Standard & Poor's 500 Index and call options on the CBOE Volatility Index. The latter will serve as a hedge against big drops in the S&P.

"A steep and sudden drop in equity market prices, such as a downward move of 20% or more in a month, is thought of as an unlikely or 'tail' occurrence," First Trust writes in the prospectus. "The index is designed to help cope with these extreme downward movements in the market by hedging its portfolio through purchasing call options on the VIX Index, or 'tail hedging.'”

The fund will not always be so hedged; it will invest 0%, 0.5% or 1% of its assets in VIX calls "depending on the level of forward expected volatility in the S&P 500." At times when it holds no VIX calls—when VIX Index futures are less than or equal to 15 or greater than 50—the fund will hold only an S&P 500 index fund.

Unlike the two-and-20 (or more) charged by many tail-risk hedge funds, the ETF, which will trade under the ticket symbol VIXH, will have a mere 0.6% management fee.

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