When most people think about investing, they think about buying when asset prices are low and waiting for the market to rise. However, the market doesn’t always move upward. Sometimes it drops and, at times, it can swing up and down repeatedly.
The VIX, or the Cboe Volatility Index, is created by Cboe Global Markets. It is a benchmark index for market volatility based on S&P 500 options. When the market is volatile, the VIX rises. When the market is relatively calm, it falls.
The VIX is often called the “fear index” because it rises when investors are uncertain about market movements, and falls when there is more predictability in securities’ prices.
This means that investors can use VIX exchange-traded funds (ETFs) to invest, based on their feelings about whether the market will become volatile in the near future. However, it is very important that investors know that VIX ETFs tend to lose money in the long run, making them suitable only for short-term trades by active investors.
|ETF Name||AUM (as of May 12, 2022)||Expense Ratio||Inception Date|
|ProShares VIX Mid-Term Futures ETF||$110 million||0.85%||Jan. 3, 2011|
|iPath Series B S&P 500 VIX Short-Term Futures ETN||$692.8 million||0.89%||Jan. 19, 2018|
|ProShares Ultra VIX Short-Term Futures ETF||$814 million||0.95%||Oct. 3, 2011|
|Simplify Volatility Premium ETF||$105 million||0.54%||May 12, 2021|
ProShares VIX Mid-Term Futures ETF (VIXM)
- 3-year return (as of May 12, 2022): 58%
- Expense ratio: 0.85%
- Assets under management (AUM as of May 12, 2022): $110 million
- Inception date: Jan. 3, 2011
The ProShares VIX Mid-Term Futures ETF tracks an index that seeks to measure the return of VIX futures contracts with roughly five months until expiration. This makes it an option for people who want to invest based on their guesses about market volatility in the medium term.
Like all VIX funds, this fund tends to lose value over time because of how it uses derivatives, but it has produced a stellar three-year return of 58%. The fund is the smallest on the list, with $110 million in assets, and charges 0.85% as an expense ratio, equivalent to $8.50 for every $1,000 invested.
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)
- 3-year return (as of May 12, 2022): -36.64%
- Expense ratio: 0.89%
- Assets under management (AUM as of May 12, 2022): $692.8 million
- Inception date: Jan. 19, 2018
Investors looking for a way to invest based on short-term volatility may be interested in the iPath Series B S&P 500 VIX Short-Term Futures ETN. This fund uses VIX futures contracts with one or two months to expiration.
The fund has more than $692.8 million in assets, which is important as it means investors looking to actively trade the fund should not have issues with liquidity. Its expense ratio is 0.89%, equivalent to $8.90 for every $1,000 invested. It’s worth noting that this fund has lost 36.64% over the past three years, showing how VIX ETFs often don’t lend themselves to long-term holding.
ProShares Ultra VIX Short-Term Futures ETF (UVXY)
- 3-year return (as of May 12, 2022): -67.40%
- Expense ratio: 0.95%
- Assets under management (AUM as of May 12, 2022): $814 million
- Inception date: Oct. 3, 2011
The ProShares Ultra VIX Short-Term Future ETF is another option for people who want to invest based on short-term volatility in the S&P 500. Like the iPath fund, it uses futures contracts with a weighted average of one month to expiration.
The fund is leveraged so it can produce a return equal to 1.5 times the movement in its benchmark each day. This means it can produce greater returns, but also greater losses, adding to potential investor risk.
The fund has $814 million in assets, which is enough to provide traders with liquidity. However, it’s the most expensive fund on the list, with an expense ratio of 0.95%, equivalent to $9.50 for every $1,000 invested. And, notably, the fund has lost close to 67% of its value over the past three years.
Simplify Volatility Premium ETF (SVOL)
- 3-year return (as of May 12, 2022): N/A
- Expense ratio: 0.54%
- Assets under management (AUM as of May 12, 2022): $105 million
- Inception date: May 12, 2021
The Simplify Volatility Premium ETF is the newest ETF on this list, with an inception date of May 12, 2021. Despite its young age, it has amassed $105 million in assets due to its unique investment strategy.
Unlike funds that aim to track the VIX, this fund sells VIX derivatives to other investors to produce an income stream while buying VIX call options to limit the negative impact of spikes in volatility.
Due to its newness, the fund is relatively untested. It had produced a quarterly return of 6.41% as of March 31, 2022, since its inception a year ago, but it’s uncertain how it will perform over the long term. One advantage of the fund is its expense ratio, which is the lowest of the funds on this list at 0.54%, equivalent to $5.40 for each $1,000 invested.
Pros and Cons of Investing in VIX ETFs
Can profit from market volatility
Easier to understand and use than derivatives
Best for short-term trading
Can be expensive
Lose value over time
Not recommended as a long-term holding
- Can profit from market volatility: VIX ETFs are generally designed to gain value when the market is volatile and lose value when the market is calm.
- Easier to understand and use than derivatives: Investors can try to profit from market volatility by using derivatives, but those strategies can be complex. VIX ETFs make it easier for investors to invest based on their volatility predictions, letting them purchase shares in a fund instead of dealing with derivatives contracts.
- Best for short-term trading: Active traders use this type of ETF to earn returns over short periods of market volatility; they tend to decline significantly over time.
- Can be expensive: VIX ETFs are often high-priced to invest in.
- Lose value over time: VIX ETFs tend to lose value over the long run, with some of the funds on this list declining by 95% or more in just three years.
- Not recommended as a long-term holding: These ETFs are considered a bad choice for long-term investors because of the demonstrated risk inherent in their track records over a few years.
Historical Performance Trends
Over the long run, VIX ETFs tend to lose value. However, in the short term they can rack up significant gains, especially in times of market volatility.
The VIX itself is volatile, moving quickly based on market sentiment. It spiked significantly in 2020 as the pandemic began, before falling back to more normal levels later that year.
Since then, it has seen spikes and falls. Astute investors who foresee times of market uncertainty could get lucky and earn significant gains, but the volatility of the VIX means investors could also buy at a high just before a market drop.
Is a VIX ETF Right for Me?
VIX ETFs aren’t designed for most individual investors. They’re made for traders who want to make short-term, tactical trades.
If you believe that market volatility is about to rise, or simply want to hedge another investment against volatility, taking a short-term VIX position could be a good idea. Long-term investors shouldn’t consider them for their portfolios.
The Bottom Line
VIX ETFs give investors a way to invest based on predictions about market volatility. As volatility rises, so will VIX ETFs. However, they are not intended for long-term investors and are instead meant for frequent traders who want to hedge another investment or who believe volatility is about to rise.
Frequently Asked Questions (FAQs)
What are VIX ETFs?
VIX ETFs are funds that try to track changes in the VIX index, an index that rises when market volatility is high and falls when volatility is low.
How can I buy VIX ETFs?
You can buy VIX ETFs through your brokerage account. You can submit a buy order to designate the number of shares to buy, or a buy-limit order, which lets you set both the number of shares to buy and the maximum price you’re willing to pay per share.
When should I buy VIX ETFs?
VIX ETFs tend to gain value when the VIX rises, so you should buy VIX ETFs when you expect market volatility to increase. This can be very difficult to predict, so it’s important to only invest amounts you’re willing to lose.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
Cboe. “VIX Volatility Suite.”
Fidelity. “Alternative ETFs: Understanding VIX ETFs.”
ProShares. “VIX Mid-Term Futures ETF.”
Barclays. “iPath Series B S&P 500 VIX Short-Term Futures ETN.”
ProShares. “Ultra VIX Short-Term Futures ETF.”
Simplify ETFs. “Simplify Volatility Premium ETF.”
Google Finance. "VIX."