There’s an ETF for That? Betting on the VIX

Long VIX futures ETFs

Remember, the VIX is an index, meaning you can’t invest directly in it. Instead, most traders use VIX futures, which are contracts to buy or sell the index’s future value at a predetermined date. Futures are highly liquid and easily packaged into ETFs, making them accessible to retail investors.

If you’re betting on the VIX to rise, a popular option is the ProShares Short VIX Short-Term Futures ETF

or the ProShares VIX Mid-Term Futures ETF

VIXM

+2.92%

. These ETFs aim to track the S&P 500 VIX Short-Term Futures Index and the S&P 500 VIX Mid-Term Futures Index, respectively.

The difference lies in the futures contracts they use. VIXY holds short-term VIX futures, which are weighted to reflect the next one-month expiration. VIXM, on the other hand, holds mid-term VIX futures, which are weighted to reflect the average of futures contracts expiring in the next five months.

VIXY tends to correlate more closely with spot VIX movements but is more prone to contango (when future prices are higher than spot prices), leading to faster price decay. VIXM, while less volatile and less correlated to the spot VIX, decays at a slower rate due to the longer time horizon of its futures contracts.

This decay is further exacerbated by the fact that the VIX is mean reverting, meaning it tends to move back toward its long-term average over time, reducing the likelihood of sustained high volatility.

If you’re using these as a hedge, the trade-off is clear: VIXY is better for short-term bets on rising volatility, while VIXM works for a longer-term hedge. For example, VIXY has a higher negative beta of -3.21, offering more sensitivity to the VIX, compared to -1.45 for VIXM. However, this comes with much faster decay over time.

For even more sensitivity to a short-term rise in volatility, consider applying leverage with the ProShares Ultra VIX Short-Term Futures ETF

. UVXY amplifies the S&P 500 VIX Short-Term Futures Index with 1.5x leverage, making it a highly responsive hedge with a negative beta of -5.43.

But this also comes at a cost—UVXY decays heavily over time due to leverage and frequent reverse splits. It’s best used only for very short-term bets on increased market volatility.

Short VIX futures ETF

The VIX tends to rise when markets fall, so with markets trending upward over the long term, you’d expect the VIX to decline. Shorting VIX futures that are in contango and mean-reverting can seem like a winning strategy, offering steady gains in most market environments.

This is the premise behind short VIX futures ETFs like the Short VIX Short-Term Futures ETF

and the Volatility Shares -1x Short VIX Futures ETF

SVIX

-7.58%

.

These funds provide -0.5x and -1x daily inverse exposure, respectively, to the S&P 500 VIX Short-Term Futures Index and the Short VIX Futures Index. While SVXY focuses on VIX futures with a one-month weighted average to expiration, SVIX incorporates first- and second-month VIX futures rolled daily.

What’s the use case for these ETFs? It’s often referred to as “picking up pennies in front of a steamroller” – you earn steady, incremental gains most of the time, but a single bad day can erase years of progress.

This dynamic was illustrated during the 2018 Volmageddon, when the VIX surged by 115% in a single day, reaching 37 in February. Many ETFs and ETNs shorting VIX futures collapsed, with SVXY suffering a staggering -95.25% drawdown.

While SVXY wasn’t liquidated, its exposure was reduced to -0.5x to mitigate the risk of another catastrophic event. Interestingly, despite this drawdown, SVXY has delivered a lifetime total return of 12.12% CAGR, matching the broader market.

Now, short VIX futures ETFs aren’t limited to these two options. One standout is the Simplify Volatility Premium ETF

, which aims to deliver -0.2x to -0.3x the inverse of the Cboe Volatility Index (VIX) short-term futures index, with a focus on income. Right now, SVOL offers a substantial 17% yield.

Unlike SVXY or SVIX, SVOL hedges tail risk by holding VIX call options. These options, while inexpensive, exhibit convexity, which provides significant upside protection in the event of a sharp volatility spike, helping cushion the ETF from extreme losses.

So far, SVOL has performed admirably. It holds a five-star Morningstar rating, indicating strong risk-adjusted returns relative to 1,276 funds in the Large Blend category, and has delivered an 11.3% annualized three-year total return.

However, it’s worth noting that the ETF debuted in May 2021, so it hasn’t faced a Volmageddon-style event like 2018. That said, SVOL deserves credit for holding up well during the recent surge in the VIX.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.