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Volati li ty ETNs and ETFs27thAnnual Risk Management Conference

Maneesh Deshpande

+1 212 526 2953

maneesh.deshpande@barcap.comBCI, New York

Rohit Bhatia

+1 212 526 0367rohit.bhatia@barcap.com

BCI, New York

Ashish Goyal+1 212 526 2771ashish.goyal@barcap.com

BCI, New York

February 28, 2011

Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 7

EQUITY RESEARCH | Equity Derivatives Strategy

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Feb 28, 20112

Increasing Liquidity in VIX Products

Source: Barclays Capital, Bloomberg, OptionMetrics

While in terms of open interest outstanding, SPX continues to dominate

More Vega is being traded in VIX related instruments

0

50

100

150

200250

300

350

400

450

Feb-09 May-09 Aug-09 Nov-09 Feb-10 Jun-10 Sep-10 Dec-10

0

500

1000

1500

2000

2500

Vix Option Vix Futures VIX ETN SPX (RHS)

0

20

40

60

80

100

120

140

160

Feb-09 May-09 Aug-09 Nov-09 Feb-10 Jun-10 Sep-10 Dec-10

Vix Option Vix Futures VIX ETN SPX

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Feb 28, 20113

Roll Cost of VIX Futures/ETNs

Source: Barclays Capital, Bloomberg, OptionMetrics

Monthly roll cost for VXX much higher than VXZ

Volatility term structure is upward sloping during normal times

-40%

-30%

-20%

-10%

0%

10%

20%

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

VXX VXZ

14%

15%

16%

17%

18%

19%

20%

0 1 2 3 4 5 6 7

Expiration (Months)

VIXFuture

Roll at maturity Yield for 1M

future

Roll a t maturity Yield for 3M

future

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Feb 28, 20114

Roll Cost for Buy and Hold VIX Futures/ETNs

Source: Barclays Capital, Bloomberg, OptionMetrics

And minimal drag for VXZ

Leading to substantial drag in VXX

0

100

200

300

400

500

600

Dec-05 May-06 Oct-06 Mar-07 Jul-07 Dec-07 May-08 Oct-08 Feb-09 Jul-09 Dec-09 May-10 Sep-10

VXX ER 1M Fut Rolled at Expiry Const Maturity F1

0

50

100

150

200

250

300

350

Dec-05 May-06 Oct-06 Mar-07 Jul-07 Dec-07 May-08 Oct-08 Feb-09 Jul-09 Dec-09 May-10 Sep-10

VXZ ER 5M Fut Rolled at Expiry Constant Maturity F5

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Feb 28, 20115

Source: Barclays Capital.

Variance Swaps (Var Notional=0.5%Equity)

Source: Barclays Capital.

VXX (Notional = 0.25*Equity)

Source: Barclays Capital.

6M ATM Puts (Notional = Equity)

Roll Cost Pays for the Convexity of VIX ETNs

Source: Barclays Capital.

VXZ ( Notional = 0.5*Equity)

-20%

-10%

0%

10%20%

30%

40%

50%

60%

70%

80%

-60% -40% -20% 0% 20% 40% 60%

SPX 6M Returns

-20%

-10%

0%

10%20%

30%

40%

50%

60%

70%

80%

-60% -40% -20% 0% 20% 40% 60%

SPX 6M Return

-20%

-10%

0%

10%

20%30%

40%

50%

60%

70%

80%

-60% -40% -20% 0% 20% 40% 60%

SPX6M

Returns

-20%

-10%

0%

10%

20%30%

40%

50%

60%

70%

80%

-60% -40% -20% 0% 20% 40% 60%

SPX 6M Returns

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VIX ETN Hedging Strategies Have Outperformed

Source: Barclays Capital, Bloomberg, OptionMetrics

Performance Metrics 1996-2010

Hedge Type

Average

Return

Standard

Deviation

Sharpe

Ratio

Sortino

Ratio Draw-down

SPTR 8.1% 18.4% 0.24 0.33 -48%

SPTR + 98% 1M SPX Put 2.5% 11.7% -0.10 -0.15 -37%

SPTR + 85% 1Y SPX Put 6.8% 12.2% 0.26 0.38 -36%

SPTR + 85% 1Y SPX Put Costless Collar 6.5% 9.2% 0.31 0.43 -30%

SPTR + 80%-95% 1Y SPX PutSpr Costless Collar 7.5% 11.0% 0.35 0.48 -30%

SPTR + VXZ 10.9% 14.4% 0.51 0.80 -37%

SPTR + VXX 6.2% 13.0% 0.20 0.33 -27%

SPTR + VXZ - VXX 12.3% 16.9% 0.51 0.72 -45%

SPTR + Dynamic VIX ETN Strategy 13.1% 14.2% 0.67 1.14 -31%

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Important Disclosures (continued) Call or put vertical spread writing/writing calls or puts (usually referred to as uncovered writing, combinations or straddles (same expiration month for both

options): The basic risk of effecting a short spread transaction is limited to the difference between the strike prices less the amount received

in premiums.

Call or put calendar spread purchasing (different expiration months & short must expire prior to the long): The basic risk of effecting a long calendar spreadtransaction is limited to the premium paid when the position is established.

Because of the importance of tax considerations to many options transactions, the investor considering options should consult with his/her tax advisor as to howtaxes affect the outcome of contemplated options transactions.

Supporting documents that form the basis of our recommendations are available on request.

The Options Clearing Corporation's publication, "Characteristics and Risks of Standardized Options", is available athttp://www.theocc.com/publications/risks/riskchap1.jsp

Barclays Capital offices involved in the production of equity research:LondonBarclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)

New YorkBarclays Capital Inc. (BCI, New York)

TokyoBarclays Capital Japan Limited (BCJL, Tokyo)

So PauloBanco Barclays S.A. (BBSA, So Paulo)

Hong KongBarclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)

TorontoBarclays Capital Canada Inc. (BCC, Toronto)

JohannesburgAbsa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)

http://www.theocc.com/publications/risks/riskchap1.jsphttp://www.theocc.com/publications/risks/riskchap1.jsp

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http://www.iiroc.ca/http://www.finra.org/

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