4 Best VIX ETFs to Buy Today

4 Best VIX ETFs to Buy Today

For many investors, stock price volatility brings both great opportunity and great fear. Therefore, it makes sense to look for financial safety nets to support your portfolio during downturns. This is what leads some investors to the VIX, a “volatility index” that does best when stock prices fall.

Investors frequently monitor potential volatility using the VIX Index during tumultuous times. To profit from this volatility, some people even invest in VIX-related instruments like exchange-traded funds (ETFs) and exchange-traded notes (ETNs). Let’s examine the top ETFs to purchase (and with some tips for doing so).

Describe the VIX

The VIX is a practical financial tool used by the Chicago Board Options Exchange (Cboe) to monitor market volatility. The implied volatility that could occur over a month is measured by the Cboe Volatility Index, or VIX for short. The S&P 500 Index options’ prices are used by the Cboe to determine the value. In other words, the VIX gauges the market’s anticipation of volatility over the next 30 days, not a certainty.

Many investors keep an eye on the VIX Index to gauge how volatile potential trading sessions will be. When options traders anticipate a tranquil month ahead, the VIX is low. However, the VIX spikes when the options market forecasts a significant movement. The VIX is sometimes referred to as the “fear index” or “fear gauge” because it only rises during times of extreme volatility or investor apprehension.

In a way, investors can also invest in the VIX. Although you cannot invest directly in the VIX, a number of ETFs follow it by owning equities that are VIX-related. These ETFs can be used by knowledgeable investors to protect against market dips and potentially generate substantial gains. However, we must first explore the realm of volatility funds before looking into VIX ETFs.

ETFs that track volatility

In general, markets will become more volatile the more worried investors are about their portfolios. Market crashes where all investors lose money are possible in the event of more extreme volatility. On the other hand, markets typically see less volatility and higher gains when investors are confident.

It’s just as simple to invest in the stock market to take advantage of minimal volatility and high gains. Gains are harder to realize in a turbulent market, though. Investors may have an advantage using volatility ETFs in this situation.

By holding or shorting volatility-related futures, volatility ETFs mimic the performance of volatility indices like the Cboe VIX. They are frequently utilized in short-term trading rather than long-term investing since they inversely correlate with market falls (their value increases as the market declines). Depending on how the issuer prefers to organize them, these ETFs can be either commodity pools or ETNs.

Volatility ETFs track what?

Investors should be aware that volatility ETFs follow futures contracts rather than the actual indices that they track. A volatility ETF will frequently perform quite differently from the index it is based upon as a result. Furthermore, because these ETFs’ performance depends on volatility, they often rise when markets fall and plummet when they rise.

Only a few volatility-based ETFs are available in the United States because of their dangerous characteristics and small market. A couple of these follow the VIX Index directly. These are known as “VIX ETFs.”

How do VIX ETFs work?

Technically speaking, “VIX ETF” is a misnomer because you cannot invest in the VIX index. Instead, VIX ETFs exist to follow VIX futures indexes, which monitor the performance of monthly VIX futures contracts with short, medium, and long terms. The VIX ETFs also fluctuate along with the underlying futures’ price movements. These exchange-traded vehicles give investors a way to profit from potential volatility.

In the long run, VIX ETFs also frequently lose money. The VIX futures curve frequently remains in contango (rises), which causes the VIX ETFs to lose value over time. They will have less money available when the current futures contract ends to acquire new ones. Many VIX ETFs experience significant losses over the long term, despite sharp spikes in price.

Purchasing VIX ETFs

Although there aren’t many, you can purchase different types of VIX ETFs. A significant portion of them are exchange-traded notes, a special asset class that entails an increased risk of issuer default. Some are inverse ETFs, which capitalize on the VIX’s contrasting moves. They benefit when the VIX declines and vice versa (in other words).

Only experienced short-term traders should use VIX ETFs because to their complexity and increased risk. Due to their extreme volatility, several issuers indicate that their products are intended for skilled investors who monitor their holdings on a daily basis.

The top four VIX ETFs to purchase right now (plus one to keep an eye on)

There aren’t many VIX and volatility exchange-traded instruments available in the United States. The fact that every investor’s circumstances are so unique means there isn’t a “best” ETF to follow the VIX. But let’s look at some of the top candidates to take into account based on their most recent results.

ProShares VIX Mid-Term Futures ETF (VIXM)

An asset pool called VIXM follows the S&P 500 VIX Mid-Term Futures Index. This index consists of VIX futures contracts with an average remaining time of five months. It enables traders to wager on slightly longer time horizons as a mid-term investment.

VIXM rarely replicates the performance of the Cboe Volatility Index because it does not. However, compared to the VIX’s short-term futures, its medium-term investing goals have historically enabled it to generate remarkable returns.

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

A tradable note called VXZ follows the S&P 500 VIX Mid-Term Futures Index. Investors are thus exposed to VIX futures contracts with maturities that vary from four to six months. Similar to the VIXM, the VXZ enables investors to profit from expectations of mid-term volatility.

This fund is less likely to follow short-term VIX swings since it adopts a longer perspective. Only experienced investors looking to make money off of short-term volatility are advised to use this instrument, according to the issuer.

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

One of the most well-liked volatility ETFs available is VXX. It holds futures contracts with maturities of just one to two months because it is a short-term fund. In contrast to some of the other ETFs on our list, VXX frequently trades higher during times of low volatility, which can improve its performance.

As an ETN, VXX is not backed by underlying assets but rather by the credit of the issuer. Even yet, with over $500 million in assets under management, it still has a sizable amount of liquidity available to investors who frequently wish to trade.

ProShares VIX Short-Term Futures ETF (VIXY)

The S&P 500 VIX Short-Term Futures Index performance is tracked by the commodities pool VIXY. Its underlying contracts often mature in a month or less.

In comparison to some of the options on our list, VIXY frequently corresponds more closely to the VIX Index because it owns Cboe VIX futures contracts. Investors who wish to hold actual securities won’t need to rely on bank credit since it contains tangible assets. However, VIXY didn’t do as well as its mid-term competitors during the time period we looked at above.

ProShares Ultra VIX Short-Term Futures ETF (UVXY)

The largest VIX exchange-traded fund on our list, UVXY, has assets worth around $1 billion. As a result, it offers a ton of liquidity for investors looking huge make very short-term futures-based investments.

UVXY monitors the S&P 500 VIX Short-Term Futures Index and utilizes special leverage to generate daily returns that are 1.5 times higher than those of its benchmark index. The fund’s 2% YTD return demonstrates that while this strategy might result in bigger rewards, it also carries more risk of losses.

Volatility ETFs: Advantages and Drawbacks

Like any assets, VIX Index ETFs have their own set of advantages and disadvantages.

PROS

  • Can increase returns from short-term investments.
  • In times of market turbulence, provide a hedge.
  • Investing in them is simpler than in the underlying derivatives.
  • Ensure that investors can gain from a “basket” of volatile securities.

CONS

  • Lose value over time
  • Not advised for first-time or buy-and-hold investors.
  • Instead of betting on assured volatility, they made a “implied” wager.
  • Value is determined by futures and options contracts, which poses special potential dangers.
  • Due to their structure or underlying holdings, many do not reflect VIX performance.
  • ETF positions “decay” over time, which means that as existing futures contracts expire, the funds have less money to invest in new ones.
  • Frequently have greater expense ratios compared to other types of exchange-traded funds.

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