Pros Pick Their Top 5 Volatility ETFs for 2024

With markets in a tailspin, everyone’s looking for a little protection.

So, it’s no surprise that financial pros have started scouting the best volatility ETFs for their portfolios since volatility tends to move in the opposite direction of the market.

Topping that list was ProShares Short-Term VIX Futures ETF (VIXY).

While this can be a great ETF to hedge against short-term market drops, there are some serious drawbacks you need to consider.

Key Facts About SMH

• Net assets: $163 million
• 12-month trailing yield: N/A
• Inception: January 1, 2011
• Expense ratio: 085%
• Number of holdings: N/A

Volatility ETFs and ETNs are a bit different than most other products.

You see, volatility isn’t a physical asset. It’s a measure.

So you can’t actually buy it.

Your only options are investing or trading in those volatility measures’ derivatives.

Large institutions do this with futures contracts, which are like options contracts, except they have the obligation, not the right, to fulfill the contract.

The VIXY holds short-term futures contracts on the S&P 500 volatility index known as the VIX.

Since futures contracts come with different settlement dates, you can buy ones that expire soon or far out into the future.

Performance

Like options contracts, futures contracts often trade at a premium to the spot price of the VIX.

For example, a futures contract that settles in one month may trade at $15 while the VIX is at $14.50.

Eventually, that premium erodes, which is why all things being equal, the value of these ETFs erodes over time.

That’s why this ETF and similar ones’ performance over long periods of time is awful.

Source: ProShares

As you can see, they do a great job of helping out when markets drop, like they did during the pandemic crash in 2020. 

But hold it long enough, and you’ll eventually lose.

That’s why these are best suited as short-term tactical instruments, not investments.

Competition

There are several other ETFs in the same arena. A few have leverage. One actually bets on the inverse. However, as you will see below, the premium associated with futures contracts erodes its value over time as well.

• iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): This ETF is similar to the VIXY, but it is from a different provider. It has more liquidity and assets under management.
• ProShares Ultra VIX Short-Term Futures (UVXY): The UVXY is the leveraged version of the VIXY, which can work incredibly well if the market collapses but will lose value faster otherwise.
• ProShares Short VIX Short-Term Futures (SVXY): This ETF bets against the VIX futures contracts, which is why it’s the only one to have a positive return over time. However, massive spikes in volatility have blown up similar ETFs in the past.
• ProShares VIX Mid-Term Futures ETF (VIXM): The VIXM is just like the VIXY, except it focuses on futures contracts with settlement dates further into the future. That makes it lose premium at a slower rate, which is why its long-term performance isn’t nearly as bad as that of the others.

Our Opinion 5/10 

We’re not big fans of holding these instruments for any length of time. Doing so is effectively trying to time market crashes, which is hard for even the best.

If you do want to play these ETFs, we suggest the VXX given its higher liquidity. And with that, we’d prefer options on the VXX because if we’re going to try and time market crashes, we’d prefer to get paid handsomely when we’re right.