Volatility ETFs

There are 10 exchange traded products that seek to track futures on the the VIX index:

ETP TypeCount
ETF4
ETN6
Total10

It's impossible to directly invest in the VIX index. So these ETPs instead buy and sell "VIX futures" on the CBOE exchange, or they track an index that measures the theoretical performance of an investor buying and selling VIX futures.

On March 26, 2004, the CBOE transformed the widely followed stock market volatility indicator - the VIX - into a security by introducing the VIX Futures. VIX futures are standard futures contracts on forward 30-day implied volatilities of the S&P 500 index. For example, a July futures contract is a forward contract on 30-day implied volatility on July expiration date.

But VIX futures, like all options, are volatile, and the returns on VIX futures don't directly track the performance of the VIX index. The VIX futures market, like other option and future markets, is often in "contango", which means that VIX futures with longer terms are more expensive than futures with shorter terms. The effect of contago is that a trader who is constantly buying and selling VIX futures will continually lose money due to "roll costs" - they will sell a VIX future with a short remaining term and immediately buy a VIX future with a longer term, which is usually more expensive.

To illustrate, let's look at a price chart of the S&P 500 VIX Short-Term Futures Total Return Index compared to the VIX Index itself:

Why do long VIX ETPs even exist?

The first volatility ETF in our database, the iPath VXX ETN has an inception date 1/29/2009. So there were not any volatility ETPs in existence at the start of the last market crash in 2007/2008. If there had been a long volatility ETP in existence back then, the returns would have been massive.

But since the first volatility ETPs were launched after the last crash, the performance of all long volatility ETPs has been terrible. That is because of two reasons:

The performance of the long VIX exchange traded products is so bad that it is difficult to even understand why they continue to exist. VXX is one of the most popular of these volatility ETPs, with over $1 billion in assets.   Here's the performance of VXX compared to the CBOE VIX index during the past year:


It can be hard to explain why a security like VXX has over $1 billion in assets, despite it's incredibly bad performance. But let's try.

Using VXX as a portfolio hedge

Part of the success of VXX in terms of attracting assets is probably due to investors using complicated portfolio hedging. With the volatility of these VIX ETPs you would only need to own a few shares in order to act as a hedge against your overall portfolio. The idea is that on a day when the S&P 500 drops 2%, one of these VIX ETP's are likely to go up 10% or more. Keep in mind that the VIX Index is very volatile - when the market tanks, the VIX can really spike.

But it isn't that easy. The day to day movements of the VIX index don't precisely track the inverse ups and downs of the S&P 500, and volatility ETPs are trading VIX futures that don't precisely track the VIX index. So the practical reality of using a volatility ETP as a portfolio hedge seems a little questionable.

More importantly, the long-term performance of the long VIX ETPs is so bad that you can't really afford to just permanently hold a long volatility ETP. The cost of your hedge would be too much. Instead, you have to use some type of mathematical formula or computer trading program to only buy a long volatility ETP when you think the market is about to tank.

SPXH, the Janus Velocity Volatility Hedged Large Cap ETF, is an example of this strategy. SPXH invests 85% in the S&P 500 and 15% to a VIX trading strategy that dynamically allocates in and out of long versus inverse VIX futures, based on a formula. SPXH is so new that it is difficult to tell if the strategy will work. It hasn't performed well to date, but supporters of this kind of strategy would probably say that you can't judge the strategy during a bull market - SPXH will theoretically shine when the market starts to go down or be more volatile. It is all so complicated that it is hard to judge.


You would think that SPXH would have done well when there has been some small downturns in the market during the past few years. But here is a chart showing the ratio of SPXH to SPY compared to SPY. As you can see, there are some down turns in SPY where SPXH:SPY does spike, but not always. The chart doesn't impressively paint a good picture.


Perhaps it is easier to just look at the ratio of SPHX to SPY by itself:


SPXH mostly just seems to underperform SPY. But again, if we start to have another market crash, SPXH may really shine.

Day trading

VIX exchange traded products are highly volatile, which attracts a lot of day traders and short-term trend traders who are attracted to a product that may go dramatically up or down in short periods of time.  That is another reason why the long VIX ETPs are so popular. Many of these day traders are using computer algorithms based on technical indicators.

Solving The Problem of Roll Costs

The above example of the effects of roll costs using the S&P 500 VIX Short-Term Futures Total Return Index involved volatility with short terms (30 days). There are volatility ETPs that track indexes of volatility futures with longer terms, and these longer-term volatility futures ETPs have different roll costs then the shorter-term volatility futures ETPs. There are also volatility ETPs that are using "dynamic" strategies that buy the volatility futures with the least potential roll costs. There are all kinds of strategies being devised to minimize the roll costs.

Inverse volatility ETPs

As explained above, the short-term ETFs that go long the VIX futures inevitably seem to lose money. So long term investors could theoretically consider buying and holding an inverse volatility ETP. XIV and ZIV are popular inverse ETPs.

But investing in an inverse volatility ETP is really not that easy, because the implied leverage and volatility of XIV and ZIV is massive. Roughly guessing, by just looking at the price chart below, the implied leverage and volatility at times is probably close to 5x. The returns are massive during a bull run when things are stable and the VIX is dropping, but if the market tanks again these will be wiped out quickly.


One way to see how volatile XIV and ZIV can be is to compare them to UPRO, a leveraged 3x ETF that attempts to track the S&P 500. XIV and ZIV are more volatile than a leveraged 3x ETF:


Here are the inverse volatility ETPs, if you want to read some examples of the approaches taken by these ETPs:

SymbolDescriptionInception DateCategoryActions
ZIVDaily Inverse VIX Medium-Term ETN11/29/2010AlternativesAnalyze
SVXYProShares Short VIX Short-Term Futures ETF10/03/2011AlternativesAnalyze


All data is a live query from our database. The wording was last updated: 11/08/2017.

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