Short Volatility ETFs are Back!

How does SVIX work?

Short volatility ETFs like SVIX provide exposure to the returns, net of fees of the Short VIX Futures Index (SHORTVOL). This index tracks the inverse daily performance of a theoretical portfolio of first and second month VIX futures contracts. To achieve this exposure, SVIX can trade a variety of derivatives, including options, swaps, and forwards. 

The daily settlement price of the Short VIX Futures Index is determined during the last 15 minutes of the day's trading session, based on the "Time Weighted Average Price (TWAP)" of its theoretical portfolio. Prospective investors should note that SVIX is not benchmarked to the inverse of the actual VIX index. Therefore, it should not always be expected to rise if the VIX falls. 

Like most inverse ETFs on the market, SVIX only tries to track the performance of the Short VIX Futures Index for a single day. Holding this ETF over longer periods can result in different returns due to the daily rebalancing mechanism especially if volatility trends high, or if there is an abnormal sequence of returns as the ETF's performance is highly path-dependant.

What is the use case for SVIX?

We should start off with an understanding of what SVIX is not intended for: a long-term buy and hold. The best-case outcome for investors who hold SVIX like this is drag from the daily rebalancing and high expense ratio, along with some returns if VIX futures continuously trend low. 

The worst-case scenario is another Volmageddon, where a sharp intra-day spike in VIX futures causes steep losses for ETFs shorting VIX futures. Multiple short VIX futures exchange-traded notes (ETNs) were liquidated in 2018 due to this. Thankfully, SVIX's leverage is limited to 1x, which should mitigate this risk. 

It's worth noting that the other notable short VIX futures ETF on the market, the ProShares Short VIX Short-Term Futures ETF (SVXY) was decimated in 2018, and consequently had its daily leverage target reduced to 0.5x to reduce the risk of such a recurrence. 

In my opinion, the proper use case for a short VIX futures ETF like SVIX is as a tactical trading tool to capitalize on anticipated declines in volatility. I'm beating a dead horse here, but investors should note that these ETFs are highly complex products best suited for advanced traders with a high risk tolerance. 

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.