Top Volatility ETFs According to the Experts

Volatility is back, and so are searches for ways to play the market swings.

While you can’t directly invest in volatility, there are several ETFs that use derivatives to track different parts of the volatility indexes and maturities.

Chief among the is the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX).

But before you snap up shares, make sure this financial pro favorite is right for your portfolio.

Key Facts About VXX

• Net assets: $410 Million
• 12-month trailing yield: N/A
• Inception: January 19, 2018
• Expense ratio: 0.89
• Number of holdings: N/A

The VXX is one of the most well-known volatility ETFs, tracking short-dated S&P 500 volatility (VIX) futures.

While the ETF shows an inception date of 2018, that is a bit misleading.

The ETF undergoes maturities at various dates. At that point, a new ETF is created and rolled into the same ticker.

In reality, the VXX has been around for well over a decade.

Because investing in volatility directly isn’t possible, most volatility ETFs use volatility futures for exposure.

Source: iPath Barclays

Like options, futures have different maturities with longer-dated ones typically commanding a higher premium.

So, as each expiration passes, the ETF must sell the current month and buy the next month.

Performance

As we’ve noted before, these ETFs are not meant to be long-term investments and should only be used as short-term hedges.

That’s because the ETF loses value over time since it holds derivatives, which cost money, and the expense ratio.

So, you always get a chart that tends to look like this for any volatility ETF over time:

Because the VIX is mean-reverting, the more leverage an ETF contains, the quicker its value erodes.

Hence, you don’t want to hold these as more than a short-term hedge.

Competition

Volatility ETF range in leverage, direction, and which part of the volatility curve they track.

Some, like the VXX, track short-term volatility with no leverage.

Others shown below have leverage, go inverse, and further out in the maturity curve.

• ProShares Short VIX Short-Term Futures (SVXY): Tracks the inverse movement of short-term VIX futures with no leverage.
• ProShares Ultra VIX Short-Term Futures (UVYX): Tracks the short-term VIX futures with 1.5x leverage.
• ProShares VIX Short-Term Futures ETF(VIXY): ProShares version of the VXX. Tracks the short-term VIX futures with no leverage.
• ProShares VIX Mid-Term Futures ETF (VIXM): Tracks the mid-term VIX futures with no leverage.

As you can see, any ETF that tracks VIX futures loses money over time.

However, if you think buying and holding the SVXY works, think again. In 2018, a similar ETF blew up when it lost over 87% of its value in a single day. 

Our Opinion 2/10 

If you have no other choice and are dead set on hedging volatility, then the VXX can work in the short-term.

However, we recommend every other avenue first, including volatility futures, options on the VIX itself, or simply cutting your positions.

Take this opportunity to read up on those instruments and find at least one strategy you’re comfortable deploying.