Although there is no “best” VIX ETF, here are five exchange-traded funds and notes to keep an eye on if you are planning to capitalize on the stock market’s volatility: VIXM, VXZ, VXX, VIXY, and UVXY. These ETFs don’t track the VIX itself but futures contracts, making them both highly volatile and less than accurate. Needless to say, VIX ETFs aren’t a great fit for inexperienced investors.
Stock price volatility brings both great opportunity and great anxiety for many investors. So during periods of decline, it’s natural to seek out financial cushions to buoy your portfolio. That drives some investors toward the VIX, a “volatility index” that performs best when stocks decline.
In times of turmoil, investors often use the VIX Index to scout potential volatility. Some even invest in VIX-related securities, such as exchange-traded funds (ETFs) and exchange-traded notes (ETNs), to profit from said volatility. Let’s look at the best ETFs to get your hands on (and what to know when you do).
What is the VIX?
The Chicago Board Options Exchange (Cboe) runs the VIX as a handy financial tool to track market volatility. The Cboe Volatility Index — VIX for short — measures implied volatility that may occur over one month. The Cboe calculates the value based on the prices of S&P 500 Index options. In other words, the VIX measures the market’s expectation — but not guarantee — of volatility in the next 30 days.
Many investors watch the VIX Index to get an idea of how volatile upcoming trading sessions may be. The VIX is low when options traders believe the next month will be calm. But when the options market predicts a big swing, the VIX pops. Because the VIX only increases during periods of high volatility or investor anxiety, the index is also known as the “fear index” or “fear gauge.”
Investors can also invest in the VIX — sort of. While you cannot invest directly into the VIX, there are several ETFs that track it via holdings of VIX-related securities. Sophisticated investors can use these ETFs to hedge against market declines and even produce hefty gains. But before we look at VIX ETFs, we need to dive into the world of volatility funds.
Generally, the more anxious investors are about their portfolios, the more volatile markets will become. More severe volatility can lead to market crashes where investors lose money across the board. Conversely, when investors are confident, markets tend to see lower volatility and greater gains.
Capitalizing on low volatility and high gains is as easy as investing in the stock market. But capturing gains when the market is volatile isn’t quite so easy. Volatility ETFs provide investors with a potential edge in this arena.
Volatility ETFs track volatility indexes, such as the Cboe VIX, by owning or shorting volatility-related futures. Because they correlate negatively to market declines (their value rises when the market sinks), they’re often used in short-term trading instead of long-term investing. These ETFs can be structured as commodity pools or ETNs based on the issuer’s preference.
What do volatility ETFs track?
Investors should bear in mind that volatility ETFs track futures contracts on volatility indexes, not the index itself. As a result, it’s very common for a volatility ETF to see vastly different performance compared to the index it’s based upon. Moreover, because the success of these ETFs depends on volatility, they tend to pop when markets decline and fall when markets post profits.
Due to their risky natures and limited audience, only a handful of volatility-based ETFs exist in the United States. Of these, a few track the VIX Index itself. We call these “VIX ETFs.”
What are VIX ETFs?
“VIX ETF” is technically a misnomer, as you can’t invest in the VIX index. Instead, VIX ETFs exist to track VIX futures indexes, which follow the performance of short-, medium-, and long-term monthly VIX futures contracts. When the underlying futures rise or fall, VIX ETFs rise or fall, too. Investors can use these exchange-traded products to profit from future volatility.
VIX ETFs also tend to lose money long-term. The VIX futures curve tends to stay in contango (goes up), which means VIX ETFs decay over time. That leaves them with less money to buy new futures when the current one expires. Long-term, many VIX ETFs see massive losses, though they pop dramatically in short spurts.
Investing in VIX ETFs
Though only a few exist, you can buy several kinds of VIX ETFs. Many are exchange-traded notes, a unique asset class that carries an additional risk of issuer default. Some are inverse ETFs, which profit from opposite movements in the VIX. (In other words, they profit when the VIX falls and vice versa.)
Due to their complexity and enhanced risk, VIX ETFs are generally recommended only for advanced, short-term traders. They’re so highly volatile that some issuers note they’re designed for sophisticated investors who check their investments daily.
The best four VIX ETFs to buy right now (and one to watch)
Only a handful of VIX and volatility exchange-traded products operate in the U.S. There is no “best” ETF to track the VIX because each investor’s situation is so different. But let’s examine some of the best picks to consider based on their recent performances.
|AUM||$90.8 million||$61.4 million||$571.1 million||$318.7 million||$927.3 million|
|*Above performance as of June 2022|
|**YTD is year-to-date. AUM is assets under management.|
ProShares VIX Mid-Term Futures ETF (VIXM)
VIXM is a commodity pool that tracks the S&P 500 VIX Mid-Term Futures Index. This index holds VIX futures contracts with an average of five months until expiration. As a mid-term investment, it allows traders to bet on slightly longer time horizons.
Because it doesn’t track the Cboe Volatility Index, VIXM rarely matches the VIX’s performance. That said, its medium-term investment objectives have historically allowed it to pull in impressive returns compared to the VIX’s short-term futures.
iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ)
VXZ is an exchange-traded note that tracks the S&P 500 VIX Mid-Term Futures Index. As such, it exposes investors to VIX futures contracts with maturities ranging from four to six months. Like the VIXM, the VXZ allows investors to capitalize on mid-term volatility expectations.
Since this fund takes a longer view, it’s less likely to track short-term VIX movements. The issuer recommends this instrument only for sophisticated investors who want to profit from short-term volatility.
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)
VXX is one of the most popular volatility ETFs on the market. As a short-term fund, it holds futures contracts that mature in just one to two months. VXX often trades higher during periods of low volatility compared to some of the other ETFs on our list, which can boost its performance.
As an ETN, VXX is backed by the issuer’s credit, rather than underlying assets. Still, its assets under management remain impressive at over half a billion dollars, meaning investors who want to trade often won’t struggle with liquidity.
ProShares VIX Short-Term Futures ETF (VIXY)
VIXY is a commodity pool that tracks the performance of the S&P 500 VIX Short-Term Futures Index. On average, its underlying contracts mature in one month or less.
Because it holds Cboe VIX futures contracts, VIXY often correlates more closely to the VIX Index than some of the alternatives on our list. And because it contains tangible assets, investors who prefer owning actual securities won’t have to rely on bank credit. However, in the period we analyzed above, VIXY didn’t perform as well as its mid-term peers.
ProShares Ultra VIX Short-Term Futures ETF (UVXY)
UVXY is the largest VIX exchange-traded fund on our list, boasting nearly $1 billion in assets. As such, it provides plenty of liquidity for investors who want to invest in very short-term futures based.
UVXY tracks the S&P 500 VIX Short-Term Futures Index and is uniquely leveraged to produce 1.5 times the returns of its benchmark index each day. While this strategy can generate greater profits, it also risks greater losses, as evidenced by the fund’s 2% YTD return.
Pros and cons of volatility ETFs
All investments come with unique pros and cons, and VIX Index ETFs are no exception.
Here is a list of the benefits and drawbacks to consider.
- Can boost short-term investment gains
- Provide a hedge during market downturns
- Easier to invest in than their underlying derivatives
- Allow investors to profit on a “basket” of volatility securities
- Lose value long-term
- Not recommended for beginner or buy-and-hold investors
- They bet on “implied” rather than guaranteed volatility
- Value is based on futures and options contracts, introducing unique potential risks
- Many don’t mirror VIX performance due to their structure and/or underlying holdings
- ETF positions “decay” over time, meaning the funds have less money to roll into new futures contracts as existing ones expire
- Often have higher expense ratios than other kinds of exchange-traded funds
What is the difference between VIX and VXX?
The VIX is a volatility index that tracks forward-facing market risk. The VXX is a VIX exchange-traded fund that invests in VIX-related securities to track and profit from changes in the Cboe Volatility Index.
When the VIX is high, is it time to buy?
VIX ETFs tend to gain value when the VIX rises, so it’s advised to buy when you expect market volatility to increase. This is incredibly difficult to predict, so only invest money you’re willing — and able — to lose.
Can you buy VIX stock?
No, you can’t buy VIX stock. However, you can trade several ETFs and ETNs that trade in related securities like futures and options.
- The VIX is a volatility index that attempts to track expected market volatility over the next 30 days.
- As volatility rises, the VIX sees greater profits; when volatility goes down, the index gives up its gains.
- VIX ETFs buy or short futures indexes or options contracts to profit off this expected volatility.
- All investing involves risk, but volatility ETFs are specifically designed for advanced traders who understand the futures contract market.
- If you still want to add VIX securities to your investment strategy, it’s essential to understand how they work and the risks they pose. You should also know the key differences between each ETF.
- Of the VIX ETFs out there, the four best-performing include the VIXM, VXZ, VXX, and VIXY. UVXY is the largest VIX ETF that experienced investors may also want to keep an eye on.
View Article Sources
- VIX Index — Chicago Board Options Exchange
- Don’t Panic, Plan It! — U.S. Securities and Exchange Commission
- Beginner’s Guide to Investing — SuperMoney
- Contango vs. Backwardation: What is the Difference? — SuperMoney
- How To Invest In The Stock Market: 8 Basic Concepts — SuperMoney
- SPX vs. SPY: Differences Explained — SuperMoney
- SPY vs. VOO: Which ETF is Best? — SuperMoney
- TQQQ vs. QQQ: What Are the Key Differences? — SuperMoney
- QQQ vs. ARKK: ETF Comparison For Long-Term Investing — SuperMoney
- Best Brokerages | June 2022 — SuperMoney