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3 VIX ETFs to Buy to Bet on Volatility

Todd Shriber
·5 min read

Investors are always hearing about volatility, even when it’s benign. Seasoned veterans know about one of the primary ways of measuring turbulence: The CBOE Volatility Index, also known as the VIX. For the adventurous, there are plenty of VIX ETFs out there to consider.

Ideally, long VIX ETFs – the are inverse or bearish products – rising as volatility increases. However, these products aren’t traditional exchange traded funds backed by stocks or bonds. Rather, VIX ETFs and exchange traded notes (ETNs) are rooted in futures because those derivatives were the original avenue for trading the “fear index.”

With that comes an array of issues investors should consider before jumping in. Contango, the scenario whereby a longer-dated futures contract is worth more than the spot price, is one of those issues.

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“Why is this a problem? Well, imagine that your goal is to always have a certain part of your portfolio invested in VIX futures,” according to Charles Schwab. “If the futures contracts are always more expensive than the current VIX level, then you pay a premium every time you buy futures. You’re essentially buying high and selling low, which erodes the value of your investment over time.”

Additionally, VIX ETFs, like their leveraged counterparts, are dreadful long-term investments. The volatility index was around 60 at the height of the global financial crisis only to tumble to around 15 at the end of 2019.

With those qualifiers in mind, here are some VIX ETFs for the bold.

  • ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY)

  • iPath Series B S&P 500 VIX Short-Term Futures ETN (CBOE:VXX)

  • iPath Series B S&P 500 VIX Mid-Term Futures ETN (CBOE:VXZ)

ProShares Short VIX Short-Term Futures ETF (SVXY)

VIX ETFs
VIX ETFs

Source: whiteMocca / Shutterstock.com

Expense ratio: 0.95% per year, or $95 on a $10,000 investment

Note the name of the ProShares Short VIX Short-Term Futures ETF. In plain English, SVXY is an inverse ETF. In this case, it’s short volatility, which for the better part of a decade, has mostly been the winning trade, save for some periods here and there. That said, SVXY also epitomizes that no VIX ETF – bullish or bearish – is a long-term investment. Check out that expense ratio of 0.95%. That’s expensive by standard.

Aside from being expensive, SVXY is just like any other inverse ETF, meaning its mechanics or how it achieves bearish exposure, aren’t conducive to lengthy holding periods.

“This short ProShares ETF seeks a return that is -.5x the return of its underlying benchmark (target) for a single day, as measured from one NAV calculation to the next,” according to the issuer. “Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period.”

SVXY could be an ideal play when electoral dust settles and markets getter a better sense of what the Biden administration’s policy agenda.

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)

VIX ETFs
VIX ETFs

Source: g0d4ather / Shutterstock.com

Expense ratio: 0.89% per year

The iPath Series B S&P 500 VIX Short-Term Futures ETN is one of the marquee VIX ETFs, though it’s an ETN, and over $1 billion in assets under management confirms as much.

VXX is the exchange traded product that provides exposure to the aforementioned CBOE Volatility Index and while this isn’t a geared product, futures factor into the equation.

VXX’s underlying index “offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants’ views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index,” according to the issuer.

The daily rolling function explains the high fee sported by VXX and is a reminder that the ETN can be dated, but shouldn’t be married.

iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ)

VIX ETFs
VIX ETFs

Source: Lightspring / Shutterstock.com

Expense ratio: 0.89% per year

As its name implies, the iPath Series B S&P 500 VIX Mid-Term Futures ETN provides exposure to mid-term VIX futures meaning its intraday behavior when volatility spikes shouldn’t be as extreme as, say, SVXY or VXX.

VXZ is comprised of fourth-, fifth-, sixth- and seventh-month VIX futures contracts. The rub with this methodology is that on days on when the VIX is rising, VXZ is likely to underperform VXX. However, the upside is the mid-term futures ETN should offer shallower swings.

Of the VIX ETFs highlighted here, VXZ is likely the one most suitable for an investor new to this type of product looking for a short-term hedge on long equity positions. One warning is VXZ recently dropped below its 200-day moving average and resides 28% below its 52-week high.

On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Todd Shriber has been an InvestorPlace contributor since 2014.

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