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VIX & Volatility ETFs: What You Need to Know

Here is what investors need to know about the market's fear gauge or the VIX and ETFs that benefit from volatility.
  • (1:30) - What Is The ViX Index and Implied Volatility?
  • (3:20) - What Are The VIX Future Contracts?
  • (5:30) - The Impact of Contango On The VIX
  • (7:00) - Pro Shares VIX ETFs: SVXY, UVXY, VIXY, VIXM
  • (9:15) - How Should These ETFs Be Used In A Portfolio?
  • 12:40) - Episode Roundup: Podcast@Zacks.com

In this episode of ETF Spotlight, I talk with Leks Gerlak, Investment Strategist at ProShares. ProShares is the world's largest provider of ETFs benchmarked to VIX futures indexes.

After remaining at historically low levels in recent years, volatility has roared back this year. The spike in volatility has resulted in a lot of interest in products that bet on volatility. However, investor should remember that volatility ETFs are complex products.

The VIX--popularly known as the “fear index” --and the S&P 500 index are generally negatively correlated and the VIX often surges when stocks plunge.

To start off, Leks explains the difference between implied and actual volatility and how the CBOE Volatility Index (VIX), which is a measure of the implied volatility of S&P 500 index options, is constructed.

As the VIX itself is un-investable, traders use VIX futures contracts to bet on volatility. What are VIX futures contracts?

VIX ETFs are based on the futures curve that usually suffers from contango i.e. later dated contracts are more expensive than near dated contracts, but there have been occasions when futures were in backwardation. We discuss how contango impacts VIX ETFs.

We then talk about the four volatility products that ProShares offers.

The ProShares VIX Short-Term Futures ETF VIXY tracks an index which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.

The ProShares Ultra VIX Short-Term Futures ETF UVXY is the 1.5X leveraged version of VIXY.

The ProShares VIX Mid-Term Futures VIX Mid-Term Futures ETF VIXM tracks an index which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of five months to expiration.

The ProShares Short VIX Short Term Futures exchange-traded fund SVXY is an inverse volatility product.  This ETF was in the news back in February when the VIX recorded its biggest spike in history, killing a couple of inverse volatility products.

How should investors use these products in their portfolio? Should they be used as short-term tactical tools only? Can they be used for portfolio hedging?

Finally, we discuss the risks associated with VIX products that investors need to be aware of.

Please visit proshares.com if you want to learn more about these ETFs. Make sure to be on the lookout for the next edition of ETF Spotlight! If you have any comments or questions, please email podcast@zacks.com.

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PRO-ULT VIX STF (UVXY): ETF Research Reports
 
PRO-SH VIX STF (SVXY): ETF Research Reports
 
PRO-VIX MT FUT (VIXM): ETF Research Reports
 
PRO-VIX ST FUT (VIXY): ETF Research Reports
 
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