Proprietary Data Insights
Financial Pros Top Volatility ETF Searches in the Last Month
Avoid This ETF at All Costs
2022 wasn’t great for investors.
As the Fed hiked interest rates, volatility skyrocketed, sending stocks soaring one day and plunging the next.
Many are thinking defensively in 2023 and looking for ways to protect their portfolios.
One idea that pops up often is using volatility ETFs.
And it seems financial pros are thinking that way.
In the last few months, interest in volatility-related ETFs grew slowly but steadily, often putting them in financial pros’ top 10 ETF searches in our proprietary Trackstar database.
Traders typically use volatility ETFs as a hedge. They aren’t something to hold long-term.
There’s one volatility ETF with a lot of search interest that’s worth warning folks about: ProShares VIX Short-Term Futures ETF (VIXY).
We’re not saying ProShares created a bad ETF or tried to suck in unsuspecting victims.
But VIXY is extremely dangerous. You shouldn’t consider it in your portfolio for anything other than a trade.
ProShares VIX Short-Term Futures ETF
ProShares VIX Short-Term Futures ETF is designed for experienced investors and traders who seek to profit from the expected volatility of the S&P 500, as measured by the prices of CBOE Volatility Index (VIX) futures contracts.
Futures contracts are like options in that they have expiration dates. But they come with an obligation, as opposed to a right, for the owner to settle up at expiration.
They’re leveraged instruments that track some aspect of the VIX, which measures volatility based on S&P 500 option prices.
VIXY provides long exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month until expiration.
It can reduce U.S. equity portfolio risk since changes in the VIX Short-Term Futures Index have historically been negatively correlated to S&P 500 returns.
But futures ETFs are a problem.
Because typically, the further you are from the expiration date, the more expensive the futures contract, a condition called contango.
As the current contract expires, a trader has to sell that contract and buy the next one in line to keep the trade going (known as a roll), which is what the ETF does.
Due to contango, this roll means selling at a lower price and buying at a higher price.
All other things equal, this lowers the ETF’s value over time.
This problem is worse because of the mean-reverting qualities of volatility indexes – a fancy way of saying they tend to move back to their historical averages.
Key Facts About VIXY
The VIXY portfolio consists primarily of monthly VIX futures contracts with a weighted average of one month until expiration.
It rolls contracts from the current month to the next to achieve this exposure. As we explained above, this rolling mechanism is one of the main reasons VIXY isn’t suitable for long-term investments, only for short-term trading or hedging.
VIXY is one of the worst assets to own long-term.
If you had invested $10,000 at the ETF’s founding in January 2011, it would be worth less than $5 today.
Trading & Investing in VIXY
VIXY trades actively, at an average of 7.1 million shares daily. It also has options available for traders who wish to play it in that manner.
Again, outside of day trading or short-term swing trading, avoid VIXY.
For a short-term hedge on your portfolio, there a few options besides VIXY.
They include iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), ProShares VIX Mid-Term Futures ETF (VIXM), ProShares Ultra VIX Short-Term Futures ETF (UVXY), and ProShares Short VIX Short-Term Futures ETF (SVXY).
Competitors’ Portfolio Composition
UVXY is the most volatile of the group, including VIXY, given its leverage. SVXY, although not as volatile as UVXY, is also leveraged, and investors should utilize it only for day trading.
VIXY charges an expense ratio of 0.85%, in line with the industry average for volatility products.
Daily Average Trading Volume
Our Opinion 0/10
If you want to hedge your portfolio long-term, there are better ways to do it than using VIXY or other volatility ETNs and ETFs.
Only experienced traders should utilize products like VIXY, and only for intraday opportunities. As an investment, we rate VIXY a zero.
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