Inverse VIX ETF Strategies and History

Inverse VIX ETFs have been around for over a decade, with the first one, the ProShares Short VIX Short-Term Futures ETF (SVXY), launching in 2011.

The VIX is a widely followed indicator of market volatility, and inverse VIX ETFs allow investors to profit from a decline in volatility.

These ETFs use a variety of strategies to achieve their inverse exposure, including futures and options contracts.

One of the most popular inverse VIX ETFs, the ProShares Short VIX Short-Term Futures ETF (SVXY), has had a relatively short history, but it has already made headlines with its significant price movements.

Consider reading: Proshares Short S&p 500 3x

Leveraged ETFs are a type of investment that amplifies the gains or losses of an underlying index. They can offer returns that are two, three, or even 10 times the return of an index.

These ETFs use options contracts to amplify the return, and they won't own the underlying securities of the index. Leveraged ETFs are best used as short-term trading vehicles, not long-term buy-and-hold positions.

Some examples of leveraged ETFs include the ProShares UltraPro QQQ (TQQQ), a three-times leveraged ETF, and the ProShares Ultra S&P 500 (SSO), a two-times leveraged ETF. These ETFs can be used to track equity indexes, single stocks, or other assets.

Here are some examples of leveraged ETFs in different sectors:

Keep in mind that leveraged ETFs can be highly speculative, and there can be a significant difference between the expected return and actual performance over the long term.

Inverse VIX ETFs can be riskier than traditional ETFs because they're designed to move in the opposite direction of the VIX, which can lead to losses if the market is calm. This is because the VIX is a measure of market volatility, and inverse VIX ETFs can lose value when the market is stable.

The VIX can be highly volatile, which means that inverse VIX ETFs can also be highly volatile, leading to significant losses if not managed properly. The VIX is known to experience sudden and large price swings, which can be challenging for investors to navigate.

Inverse VIX ETFs often use complex financial instruments, such as derivatives, which can increase their risk profile. These instruments can be difficult to understand and manage, even for experienced investors.

If this caught your attention, see: Vix Leveraged Etf

If you're considering using leveraged ETFs, it's essential to understand that they're designed for trading, not investing. They're not for everyone, and you should only use them if you're prepared for steep losses.

Leveraged ETFs amplify gains or losses, which can be beneficial for traders who understand the risks involved. They use options contracts to amplify returns, but this also means they can lose value quickly.

To use leveraged ETFs effectively, you need to be familiar with the concept of shorting an investment and the risks involved. This means being able to manage a position on a daily basis, as the daily reset can significantly impact longer-term performance.

You should only use leveraged ETFs if you can tolerate losing a lot of money in a short time. If you're not comfortable with this level of risk, it's best to avoid them altogether.

Here are some key characteristics to consider:

The world of inverse VIX ETFs can be complex and intimidating, but don't worry, I'm here to break it down for you.

There's only one inverse VIX ETF that's worth considering: the SVXY. This ETF uses futures contracts to provide short exposure to the VIX.

Inverse VIX ETFs are not for the faint of heart. They're highly complex instruments with unique risks, and they're intended for sophisticated traders with very short-term time horizons.

You should be aware that inverse ETFs can be riskier investments than non-inverse ETFs. They're only designed to achieve the inverse of their benchmark's one-day returns, not longer-term returns.

The VIX has risen significantly over the past year, largely due to investor uncertainty over the war in Ukraine, inflation, and rising interest rates. It's up 28.2% over the past year.

Here are the two inverse volatility ETFs that trade in the U.S.:

SVIX was launched earlier in 2022, but it doesn't have a 1-year trailing total return, so it's not included in our analysis.

Inverse volatility ETFs can be a double-edged sword, providing a way to profit from low volatility but also carrying significant risks.

The Cboe Volatility Index, or VIX, can be a misleading benchmark, as it's based on investors' perception of risk, not actual market conditions.

A sudden change in the VIX, like the 110% rally on February 5, 2018, can wipe out the value of inverse volatility ETFs in a matter of days.

Inverse volatility ETFs rebalance daily, which can be a disadvantage when taking a long-term inverse position, and shorting an index fund may be a more cost-effective option.

Higher operating expenses due to active management can reduce the fund's assets and investor returns, making them less attractive than passive ETFs.

The complexity of volatility-based products can be a significant drawback, especially for retail investors who may not fully understand the underlying securities and indexing.

The history of volatility is a wild ride.

Global economies were recovering from the 2008 financial crisis, with falling unemployment, steady GDP growth, and low inflation in the United States.

A period of relative calm in the stock market ensued, which proved to be a blessing for inverse volatility ETF investors.

The year 2017 was particularly rewarding for these investors, with some products achieving returns in excess of 50%.

The calm was short-lived, as the VIX suddenly rallied by over 110% on February 5, 2018, catching many investors off guard.

Investors who had purchased inverse volatility ETFs the previous Friday saw most of their value disappear.

An inverse volatility ETF is a financial product that allows investors to bet on market stability, essentially wagering that the market will remain calm. This type of ETF uses the Cboe Volatility Index (VIX) as its benchmark, which gauges investors' perception of how risky the S&P 500 Index is.

If the VIX rises, the fund loses value, but if it falls, the fund gains value. The managers of these funds trade futures to produce their returns, with the goal of achieving daily returns that are equal to -0.5 times the daily performance of the S&P 500 VIX Short-Term Futures Index.

Broaden your view: Value Index Etf

The VIX is a key component of inverse volatility ETFs, and its value can fluctuate significantly. In 2018, the VIX suddenly rallied by over 110%, wiping out most of the value of inverse volatility ETFs purchased just days earlier.

The ProShares Short VIX Short-Term Futures ETF (SVXY) is an example of an inverse volatility ETF that tracks the VIX. It has a daily reset feature, which leads to the compounding of returns when held over multiple holding periods. This makes it suitable for short-term trading by sophisticated investors with a high tolerance for risk.

Here's a breakdown of the key features of the SVXY ETF: