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VXX loses

Roll Yields'

That issue isn't disclosed until page 15 of the note's prospectus: "The existence of contango in the futures markets could result in negative 'roll yields', which could adversely affect the value of the index underlying your ETNs and, accordingly, decrease the payment you receive at maturity or upon redemption."

Kristin Friel, a spokeswoman for London-based Barclays, declined to comment.

The average ETN annual investor fee is 0.84 percent, according to Morningstar data. That doesn't include a lot of the tacked-on charges, Lee said. The UBS short VIX ETNs, for example, add about a 4 percent annual fee for "event-risk" hedging, leading to a total cost of 5.35 percent, he said.

Christiaan Brakman, a UBS spokesman, declined to comment.

ETFs betting on volatility also have declined because of contango. The ProShares VIX Short-Term Futures ETF, which tracks a similar index as the Barclays note, has fallen 57 percent since inception in January 2011.

Inexperienced traders looking to make a "quick buck" are behind some of the demand for volatility notes, said Bill Luby, founder of the VIX and More blog who has traded the securities. These investors "are probably not sophisticated enough to buy options," Luby said in a telephone interview, so they buy notes tied to volatility.

Barclays VIX Note Vexes Investors Not Savvy on Volatility
By Matt Robinson and Margaret Collins - May 2, 2012


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