With volatility on the rise and the Dow Jones Industrial Average seeing its largest point drop ever on Monday, E*TRADE is ending margin trading on a volatility ETF. First spotted by Bloomberg, E*TRADE Financial Corporation (ETFC) sent out a notice to customers that the margin requirement for the iPath S&P 500 VIX Short-Term Futures ETF (VXX) has risen to 100% from 60%. That means investors have to rely on their own cash.
The notice, which Bloomberg posted on its website, said that “in order to effectively manage the risks associated with margin accounts, E*TRADE’s Margin Risk team periodically reviews margin requirements.” E*TRADE noted that this change may decrease the purchasing power and could put the account at risk of a “house call if your equity falls below the minimum requirement.” According to Bloomberg, the change could result in margin calls for those accounts that used borrowed money to invest in the iPath S&P 500 VIX Short-Term Futures ETF.
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According to Bloomberg, the ETF jumped 33% on Monday alone thanks to the bloodletting in the stock markets. Investors who had shorted that ETF could be in trouble as a result, which could be the reason E*TRADE changed the margin requirement, noted Bloomberg.
After a strong run-up in stocks for two years, a pullback that erased nearly two-thirds of the advances in January kicked in last week over concerns that the economy is growing too quickly and that a drop in unemployment and a pickup in wages will force the Federal Reserve to raise interest rates. Strong corporate earnings, while good news, are also worrying investors about an overheated economy. While industry watchers are divided as to whether this is the start of a correction or a necessary pullback, all agree that there will be more volatility in the stock market his year.
At the same time that E*TRADE is hedging with the iPath S&P 500 VIX Short-Term Futures ETF, it is expanding its offering of commission-free ETFs. In a press release last week, the New York-based discount brokerage said that it has added 80 commission-free ETFs from seven providers since Aug. 1. With the additional 80, E*TRADE now offers 225 commission-free ETFs, which it said is a 51% increase.
“It’s often said that a balanced portfolio is greater than the sum of its parts,” said Rich Messina, senior vice president of investment product at E*TRADE, in a press release announcing the expansion. “But at the heart of a well-constructed portfolio are core products that carry the workload and which are designed to either help improve returns or defend against changing market conditions. With the recent additions to our Commission-Free ETF Program, comprehensive diversification, across practically any asset class, is now more easily and cheaply attainable than ever before.”