10-K: VS Trust 10-K Filing: Details on VIX Futures ETFs and Financial Performance

This document is an annual report detailing the structure, operations, and financial performance of VS Trust's two VIX futures ETFs, SVIX and UVIX, for the fiscal year ended December 31, 2023.

Summary

• VS Trust is a Delaware statutory trust comprising two separate series, the -1x Short VIX Futures ETF (SVIX) and the 2x Long VIX Futures ETF (UVIX).
• Both SVIX and UVIX commenced investment operations on March 28, 2022, and their shares are listed on the Cboe BZX Exchange.
• SVIX seeks daily investment results that correspond to the inverse performance of the Short VIX Futures Index, while UVIX aims for twice the performance of the Long VIX Futures Index.
• The funds are commodity pools regulated under the Commodity Exchange Act and CFTC rules, with Volatility Shares LLC serving as the sponsor and commodity pool operator.
• As of February 29, 2024, SVIX had 3,160,000 shares outstanding and UVIX had 7,214,975 shares outstanding.
• The aggregate market value of non-affiliate holdings as of June 30, 2023, was $72,302,413 for SVIX and $85,338,802 for UVIX.
• For the year ended December 31, 2023, SVIX's net asset value increased by 170% to $125,057,419, while UVIX's net asset value decreased by 44% to $69,664,996.
• SVIX's net income for 2023 was $103,506,817, and UVIX experienced a net loss of $276,923,037.
• The management fee for SVIX is 1.35% per annum of its average daily net assets, and for UVIX, it is 1.65% per annum.

Sentiment

Score: 4

Explanation: The document presents a mixed picture, with SVIX showing strong positive performance but UVIX experiencing significant losses. The overall sentiment is neutral to slightly negative due to the high risks and complexity of the products.

Positives

• SVIX experienced substantial growth in net asset value, increasing by 170% in 2023.
• SVIX generated a significant net income of $103,506,817 in 2023.
• The funds have a clear investment strategy and are transparent about their daily rebalancing and use of financial instruments.
• The Sponsor actively manages risks, including counterparty credit risk, by using collateral arrangements and limiting exposure to individual counterparties.
• The funds provide daily website disclosure of portfolio holdings, ensuring transparency for all market participants.

Negatives

• UVIX experienced a significant decrease in net asset value, declining by 44% in 2023.
• UVIX incurred a substantial net loss of $276,923,037 in 2023.
• The funds are not designed for long-term holding due to the effects of daily compounding and rebalancing.
• The funds are subject to market risk, credit risk, and liquidity risk, which can lead to significant losses.
• The funds' performance can be significantly impacted by the volatility of the VIX futures market and the potential for contango or backwardation.

Risks

• The funds are subject to market risk, including the volatility of VIX futures contracts, which can lead to significant losses.
• Counterparty risk exists with OTC derivatives, where a counterparty's failure to perform could result in losses.
• Liquidity risk is present, as financial instruments may not always be easily liquidated at desired prices.
• The funds use leverage, which can magnify both gains and losses, increasing the risk of total loss.
• The daily rebalancing of the funds' portfolios can lead to increased trading costs.
• The funds' performance is subject to the effects of compounding, which can cause returns to differ significantly from the benchmark over longer periods.
• The funds are exposed to the risk of contango and backwardation in the futures market, which can negatively impact returns.
• The funds are subject to regulatory risks, including changes in CFTC rules and regulations.
• The funds are exposed to cybersecurity risks, which could disrupt operations and compromise sensitive information.

Future Outlook

The document does not contain specific forward-looking statements or guidance beyond the description of the funds' investment objectives and strategies.

Management Comments

• The Sponsor believes that a Fund will enter an extended rebalance period most often during periods of extraordinary market conditions or illiquidity in VIX futures contracts.
• The Sponsor will seek to minimize the market impact of rebalances across all exchange traded products based on VIX futures contracts that it sponsors.

Industry Context

This announcement is relevant to the broader trend of volatility-linked exchange-traded products and the increasing interest in strategies that provide leveraged or inverse exposure to market volatility. The document highlights the complexities and risks associated with such products, which are important for investors to understand.

Comparison to Industry Standards

• The funds' daily rebalancing strategy is common among leveraged and inverse ETFs, but it also introduces unique risks and costs.
• The management fees of 1.35% for SVIX and 1.65% for UVIX are within the range of similar leveraged and inverse ETFs, but investors should consider these costs when evaluating performance.
• The funds' use of VIX futures contracts is a standard approach for gaining exposure to market volatility, but the specific indices used (Short VIX Futures Index and Long VIX Futures Index) are not as widely tracked as the VIX itself.
• The funds' performance is highly dependent on the volatility of the VIX futures market, which can be unpredictable and lead to significant deviations from the stated investment objectives.
• Compared to traditional ETFs that track broad market indices, these funds are significantly more complex and carry higher risks, making them unsuitable for many investors.

Corporate Governance

Stakeholder Impact

• Shareholders of SVIX experienced significant gains in 2023, while shareholders of UVIX experienced substantial losses.
• Authorized Participants are responsible for creating and redeeming Creation Units, and their activities impact the funds' liquidity and trading volume.
• The Sponsor and Commodity Sub-Adviser are responsible for managing the funds' portfolios and ensuring compliance with regulations.
• The funds' service providers, including the administrator, custodian, and transfer agent, play a critical role in the funds' operations.

Next Steps

• The Sponsor will continue to monitor the funds' performance and make adjustments as necessary to meet their investment objectives.
• The Sponsor will continue to manage risks, including counterparty credit risk and liquidity risk.
• The Sponsor will continue to provide daily website disclosure of portfolio holdings.

Key Dates

Keywords

VIX Futures, Leveraged ETF, Inverse ETF, Volatility, Commodity Pool, SVIX, UVIX, Daily Rebalancing, Futures Contracts, Options, Swaps, Volatility Shares LLC