The one constant in the stock markets is change. Put another way, volatility is a constant companion to investors, which is why the Cboe Volatility Index (VIX) is so widely tracked. Ever since this measurement of investor sentiment regarding future volatility was introduced, alo🌄ng with subsequent futures and options, many investors have explored&🍨nbsp; the best ways to trade the VIX Index.

Realizing the generally negative correlation between 澳洲幸运5开奖号码历史查询:volatility and stock market performance, many investors have sought to use volatility instruments to hedge their portfolios. In this article, we'll review four ways you can trade the VIX using specific exchange-traded funds (ETFs) and exchange-traded notes available via o𝔉nline brokers.

Understanding the VIX

Before trading 澳洲幸运5开奖号码历史查询:exchange-traded funds (ETFs) and 澳洲幸运5开奖号码历史查询:exchange-traded notes (ETNs) tied to the VIX itself, it's important to clearly understand what the VIX represents. VIX is the ticker symbol for the Cboe Volatility Index. While often presented as an indicator of stock market volatility and sometimes called the "Fear Index", this characterization is not entirely accurate.

VIX is a weighted mix of the prices for a range of S&P 500 澳洲幸运5开奖号码历史查询:index options, from which 澳洲幸运5开奖号码历史查询:implied volatility is derived. VIX measures how much people are willing to pay to buy or sell the S&P 500, with higher prices indicating greater uncertainty.

This is not the 澳洲幸运5开奖号码历史查询:Black-Scholes model—VIX is centered on "implied" volatility and measures the market's expectations for volatility over the next 30 days. Although, VIX is often discussed in terms of spot volatility, the ETFs or ETNs available do not represent the spot VIX. Instead, they are collections of futures on the VIX that only roughly approximate the performance of the VIX.

A Host of Choices

The iPath Series B S&P 50🐈0 VIX Short-Term Futures ETN (VXX)

While investors will often refer to VIX ETFs, in fact, the majority of tradable volatility derivatives are 澳洲幸运5开奖号码历史查询:exchange-traded notes (ETNs). One of the largest and most successful VIX products is the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX). The VXX is issued by Barclays plc’s iPath and has an expense ratio of 0.89% and around $227 million in 澳洲幸运5开奖号码历史查询:assets under management (AUM) as of September 16, 2024.

The ETN formerly traded as the iPath S&P 500 VIX Short-Term Futures ETN (VXX) from its inception date of Jan. 29, 2009, until its maturity date of Jan. 30, 2019. Previously, VXX had a 10-year maturity, whereas the series B is a 30-year ETN and matures on Jan. 23, 2048.

This ETN holds a long position in first and second-month VIX futures contracts that roll daily. Because there is an insurance premium in longer-dated contracts, the VXX experiences a negative roll yield, also known as 澳洲幸运5开奖号码历史查询:backwardation, meaning long-term holders will see a penalty to returns.

As a result, the performance of the VXX is stronger in the short term but not in the long term. Below are the inves🌞tm🧔ent returns based on various time periods as of September 16, 2024.

• One month: -3.94%
• Three months: -3.42%
• One year: -47.71%
• Three years: -51.76%
  

Because volatility is a 澳洲幸运5开奖号码历史查询:mean-reverting phenomenon, VXX often trades higher than it otherwise should during periods of low pre🎃sent volatility (pricing in an expectation of increased volatility) and 🐻lower during periods of high present volatility (pricing a return to lower volatility).

The iPath Series B S&a☂mp;P 5💎00 VIX Mid-Term Futures ETN (VXZ)

The iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ) is structurally similar to the VXX, but it holds positions in fourth-, fifth-, sixth-, and seventh-month VIX futures.

Accordingly, this is much more a measure of future volatility, and it tends to be noticeably less volatile. This ETN typically has an average duration of around five months, and that same negative roll yield applies—if the market is stable and volatility is low, the futures index will lose money.

VXZ has an expense ratio of 0.89% and over $33 million in assets under management (AUM) as of September 16, 2024.

Similar to VXX, the returns for VXZ are better in the short term versus the ⛎long term. Below are the performance returns based on available time periods as of September 16, 2024.

• One month: 0.24%
• Three months: 3.90%
• One year: -22.81%
• Three years: –20.48%

The ETN formerly traded as the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) and had a maturity date of Jan. 30, 2019. The inception date for the series B 30-year ETN was Jan. 17, 2018, and the maturity date is Jan. 23, 2048.

The ProShares VIX Mid-Term Futures ETF (VIXM)

The ProShares VIX Mid-Term Futures ETF (VIXM) VIXM tracks the S&P 500 VIX Mid-Term Futures Index, which measures the portfolio returns of VIX futures contracts that have a weighted average of five months to expiration. VIXM uses Cboe VIX futures contracts to help investors earn a profit from an increase in expected volatility in the S&P 500 index.

The VIXM has an expense ratio of 0.85% with around $27 million in assets under management (AUM) as of September 16, 2024.

Below are the performance returns of the VIXM based on ﷽availa✱ble time periods as of September 16, 2024.

• One month: 4.72%
• Three months: 3.57%
• One year: -18.16%
• Three years: -21.85%

The VIXM holds relatively longer-dated futures contracts and doesn't track the CBOE VIX. As a result, the fund can perform differently from the VIX. The VIXM is designed for knowledgeable investors with a short-term investment goal or who may want to 澳洲幸运5开奖号码历史查询:hedge their equity exposure.

The ❀ProS🔴hares Short VIX Short-Term Futures ETF (SVXY)

There is also an ETF for investors looking to play the other side of the volatility coin. The ProShares Short VIX Short-Term Futures ETF (SVXY) is an 澳洲幸运5开奖号码历史查询:inverse ETF that seeks daily investment results equal to one-half the inverse of the daily performance of the S&P 500 VIX Short-Term Futures Index.

The SVXY has a slightly higher expense ratio of 0.95% and more than $389.4 million in assets under management (AUM) as of September 16, 2024.

A critical key for investing in SVXY is understanding that the fund is only intended for short-term trading and is not a 澳洲幸运5开奖号码历史查询:buy-and-hold strategy. SVXY seeks its inverse return from its underlying benchmark for a single day, as measured from one 澳洲幸运5开奖号码历史查询:net asset value (NAV) calculation to the next. Investors in SVXY should monitor and manage their investments daily. Inverse ETFs held for more than a day can lead to significant losses.

Below are 🥂the performance returns of the SVXY based on available time periods as of September 16th, 202ꦿ4.

• One month: -8.96%
• Three months: -9.49%
• One year: 19.13%
• Three years: 22.99%

Beware the Lag

Investors considering these ETFs and ETNs should realize that they are not proxies for the performance of the spot VIX. These instruments can at times perform very differently from the VIX. Some may rise or fall in tandem with the VIX, but the rate at which they move and the lag time can make pinpointing entry and exit points challenging even for seasoned traders.

Market volatility investments are best suited for investors with a short-time horizon who can closely watch their 🌌positions and move quickly if the market turns against them.

If investors want to place bets on equity market volatility or use﷽ them as hedges, the VIX-related ETF and ETN products are acceptable but highly-flawed instruments. They do, however, have a strong convenience aspect to them, as they trade like any other stock.

The Bottom Line

Volatility is a measure of dispersion seen in financial instruments. Volatility is represented by the CBOE Volatility Ind🐬ex (VIX) and investors have sought ways to trade this index, primarily as a means to hedge their portfolios. Several exchange-traded notes (ETNs) and exchange-traded funds (ETFs) serve as tradable derivatives of the VIX. These instruments track VIX futures, not the index itself, hence, their performance mꦍay differ from that of the VIX.