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The Chicago Board Options Exchange Market Volatility Index (VIX), was introduced as a tool to gauge the severity of stock market swings, and has fittingly been dubbed the “fear index.” Many exchange-traded funds (ETFs) have since come to market, with the explicit aim of profiting by investing in ways that counter the VIX’s movements. Such ETFs, which have come to be known as “inverse VIX ETFs”, attract investors who seek downside protection during chaotic markets. Unfortunately, in recent years, many such funds fell short of this goal, when they theoretically should have flourished.
KEY TAKEAWAYS [PLEASE FORMAT THIS INTO A PROPER CALL OUT BOX]
–The Chicago Board Options Exchange Market Volatility Index (VIX) measure market volatility.
–Many exchange-traded funds, known as “inverse VIX ETFs”, have emerged, specifically for the purpose of countering the VIX’s movements, to lock in profits.
–In 2018, many inverse VIX ETFs tanked in the face of market volatility.
In February of 2018, the VIX saw its biggest one-day gain ever, jumping more than 115%, which devastated many of the funds that shorted futures connected to this index. Some previously high-flying funds, such as VelocityShares Daily Inverse VIX Short-Term ETN (XIV), and VelocityShares VIX Short Volatility Hedge ETN (XIVH), permanently shuttered their doors, soon after.
Other similar funds, such as the ProShares Short VIX Short-Term Futures ETF (SVXY) and the REX VolMAXX Short VIX Futures Strategy ETF (VMIN), were badly bruised, but remained standing. Both have since decreased their exposures to the VIX.
There are many potential reasons that these funds failed. But for many lower-volume funds, investors struggled to nimbly sell off their positions when they desired, to due a lack of buyers for the shares they sought to unload. In any case, the following funds represent some of the hardest hit, in 2018.
Note: All figures are current as of September 10, 2018.
1. ProShares Short VIX Short-Term Futures ETF (SVXY)
This fund uses the S&P 500 VIX Short-Term Futures Index as its benchmark. It measures a rolling long position and provides an 0.5 inverse exposure to the underlying index versus twice that amount, prior to the recent selloff. In other words, it is not a leveraged ETF.
- Average Volume: 10,774,412
- Net Assets: $439.46 million
- 2017 Return: 181.84%
- 2018 YTD Return: -88.95%
2. REX VolMAXX Short VIX Futures Strategy ETF (VMIN)
This fund uses the S&P 500 VIX Mid-Term Futures Index as its benchmark. It targets inverse exposure to mid-term VIX futures with between two and six months left to expiration.
- Average Volume: 63,898
- Net Assets: $9.91 million
- 2017 Return: 53.13%
- 2018 YTD Return: -90.60%
3. VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV)
Like VMIN, this fund also uses the S&P 500 VIX Mid-Term Futures index as its benchmark. This fund uses exchange-traded notes to achieve an inverse return on this index.
- Average Volume: 87,211
- Net Assets: $142.27 million
- 2017 Return: -12.33%
- 2018 YTD Return: -18.31%
The Bottom Line
The performance of these funds reflect a failure of their intent to lock in profits during volatile markets. But not all inverse VIX ETFs are destined for the same fate. Such funds, helmed by shrewd money managers who command a robust understanding of how volatility affects stocks prices, can use volatility to their advantage.
[Important: In most cases, inverse VIX ETFs are best used as short-term plays, rather than long-term investments.]
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