Leveraged VIX ETFs for Volatility Investing

Leveraged VIX ETFs allow investors to amplify their returns by 2x or 3x the daily movement of the VIX index, which measures market volatility.

These ETFs are designed to provide a quick and easy way to gain exposure to volatility, but they come with a price tag - a higher risk of significant losses.

The ProShares UltraPro Short VIX Short-Term Futures ETF (SVXY) is an example of a 3x leveraged VIX ETF, which has a daily tracking error of up to 100%.

Investors should be aware that these ETFs are not suitable for long-term investments and should be used with caution.

Leveraged VIX ETFs are a type of investment product that allows traders to gain exposure to the Cboe Volatility Index (VIX) through the futures market.

These ETFs are designed to track the performance of the VIX index, which increases during times of heightened market volatility and falls during calm market periods. UVIX, for example, tracks the Long VIX Futures Index (LONGVOL), which aims to hold a mixture of first and second-month VIX futures contracts.

The Long VIX Futures Index (LONGVOL) tracks the daily performance of a theoretical portfolio of first and second-month VIX futures contracts that are rolled daily. This portfolio is designed to achieve a weighted average of 30 days to settlement.

A long VIX futures position profits when the VIX index increases to higher levels, pulling VIX futures contracts up along with it. UVIX traders are effectively long Cboe volatility index futures.

To trade anticipated changes in the VIX index, traders turn to VIX futures and options. Trading VIX futures is a risky endeavor, as one VIX futures contract represents $1,000 per point in notional value.

Here are some key characteristics of leveraged VIX ETFs:

The VIX index cannot be traded directly, but UVIX allows positive leveraged exposure to changes in the VIX index through the VIX futures market.

The VIX is a measure of expected stock market volatility over the next 30 days, as implied by S&P 500 Index options prices. It's not based on actual price fluctuations, but rather a gauge of investor sentiment.

The VIX itself is not investible, so you'd typically get exposure to volatility through VIX futures or other derivatives. This means VIX-linked ETPs tend to track or are linked to VIX futures, which can have their own set of risks.

VIX futures prices are highly correlated with movements in the VIX, but don't track it precisely, and the degree of correlation can depend on the maturity date. The price sensitivity of VIX futures to the underlying VIX can be quite a bit less than expected, especially for longer-dated futures.

The VIX, also known as the "fear index", is a gauge of investor confidence in the market that tends to be based on stock market reactions.

It's a useful tool for mainstream investors looking to trade in stocks directly. The VIX index is not directly accessible to investors, so they use VIX ETFs to track VIX futures indexes instead.

These VIX ETFs are often ETNs, which carry counterparty risk, but this is not typically a major concern for investors. One of the most popular VIX ETFs is the iPath S&P 500 VIX Short-Term Futures ETN (VXX), which maintains a long position in first- and second-month VIX futures contracts.

VXX tends to trade higher during periods of low present volatility because of the tendency for volatility to revert to the mean. This characteristic introduces a number of risks that investors should keep in mind.

Inverse VIX ETFs, on the other hand, profit from the opposite movement of the VIX, often used to protect a portfolio during turbulent times. One example is the ProShares Short VIX Short-Term Futures ETF (SVXY), which provides an 0.5x inverse exposure to the underlying index.

SVXY returned a whopping 181.84% in 2017, but had returned -91.75% by mid-July 2018.

The Volatility Index is often referred to as the "fear index" because it gauges investor confidence in the market. It tends to increase when stock prices fall and vice versa.

The VIX is largely based on stock market reactions, and it tends to exaggerate the degree of volatility. For example, when stock prices fall, the VIX often increases.

The Cboe Volatility Suite offers VIX options and VIX futures, allowing investors to make wagers based on the volatility index itself. This is a unique way to trade based on the VIX.

Here are some key characteristics of the VIX:

The VIX index is a calculation of market implied volatility using S&P 500 Index options with around 30 days to expiration. This is why VIX ETFs, such as UVIX, track the LONGVOL index, which tracks 2x the single-day percentage changes of the first and second-month VIX futures contracts.

Leveraged VIX ETFs are inherently finicky and can be extremely volatile. They're not great at mirroring the VIX, capturing only about 25% to 50% of daily VIX moves.

In fact, mid-term products tend to perform even worse. This is because VIX futures indexes, the benchmarks for VIX ETFs, tend to be unsuccessful at emulating the VIX index.

Leveraged VIX ETFs experience massive losses when volatility levels in the market spike. This can be so dramatic that these ETFs can be virtually annihilated due to a single bad day or period of high volatility.

If you can't tolerate losing a lot of money in a short time or don't understand how these funds operate, they are not for you. Leveraged and inverse products are designed for trading, not investing.

Here are some key risks to consider:

The VIX itself is more accurately described as a measure of "implied" volatility, rather than volatility directly. This means it measures how much investors are willing to pay to buy or sell the S&P 500, not actual price fluctuations.

VIX ETFs are known for not mirroring the VIX well, capturing only 25% to 50% of daily VIX moves. This is because VIX futures indexes, which are the benchmarks for VIX ETFs, tend to be unsuccessful at emulating the VIX index.

In addition, VIX ETF positions decay over time due to the behavior of the VIX futures curve. This decay process results in a loss of money over the long term.

Inverse volatility ETFs experience massive losses when volatility levels spike, and can be virtually annihilated due to a single bad day or period of high volatility. This makes them unsuitable for investors without a strong knowledge of how volatility works.

Here are some key risks associated with VIX ETFs:

It's essential to carefully consider the risks and complexities of VIX ETFs before investing.

If you're considering using leveraged or inverse ETFs, here are some key characteristics of the right investor.

You should be someone who understands and accepts the potential for steep losses.

If you're familiar with the concept of shorting an investment and the risks involved, that's a plus.

You should also be aware that the daily reset can significantly impact longer-term performance.

To use these funds effectively, you need to be able to manage a position on a daily basis.

This means being able to adjust your investment holdings daily to keep up with the market.

If you can't tolerate losing a lot of money in a short time, these funds are not for you.

Here are the key characteristics of someone who can use leveraged or inverse ETFs:

Leveraged VIX ETFs are designed to track the VIX index, which is a calculation of market implied volatility using S&P 500 Index options with around 30 days to expiration.

To gain exposure to the VIX index, traders often turn to VIX futures and options, which can be traded directly.

The VIX index itself cannot be traded directly, but it can be tracked through VIX futures contracts, which represent a significant amount of notional value, with a 10-point move translating to a P/L of $10,000 on one contract.

UVIX, a 2x long volatility product, seeks to provide daily investment returns that correspond to twice the performance of the Long VIX Futures Index (LONGVOL), which tracks the daily performance of a theoretical portfolio of first and second-month VIX futures contracts that are rolled daily.

UVIX calculates its net asset value (NAV) by adding 2x the current trading day's LONGVOL change to the previous closing price, resulting in a daily NAV that corresponds to the performance of the LONGVOL index.

UVIX is a 2x leveraged long volatility product that aims to return 2x the daily percentage change of a portfolio consisting of first and second-month VIX futures contracts.

UVIX is a volatility product that allows traders to gain leveraged exposure to changes in the VIX index through the futures market.

SVIX, on the other hand, is a short volatility product that seeks to provide daily investment returns before fees and expenses that correspond to the performance of the Short VIX Futures Index.

SVIX aims to return -1x the daily percentage change of a portfolio consisting of first and second-month VIX futures contracts, which is the opposite strategy of UVIX.

The main difference between UVIX and SVIX is their approach to volatility, with UVIX seeking to amplify gains and SVIX seeking to limit losses.

The Long VIX Futures Index, also known as LONGVOL, is the benchmark index tracked by UVIX. It's a theoretical portfolio of first and second-month VIX futures contracts that are rolled daily to achieve a weighted average of 30 days to settlement.

LONGVOL tracks the daily performance of a mixture of first and second-month VIX futures contracts. If it's February 1st, the first-month VIX future will be the February contract, and the second-month VIX future will be the March contract.

A long VIX futures position profits when the VIX index increases to higher levels, pulling VIX futures contracts up along with it. The LONGVOL index will therefore increase during rising or persistently high volatility market conditions where VIX futures are in backwardation.

Here are some key characteristics of LONGVOL:

The LONGVOL index will lose substantial value during extended periods of low volatility, as VIX futures are in contango, leading to decaying near-term VIX Futures. Conversely, it will gain significant value during periods of surging market volatility.