Volatility surged to the highest levels since 2008 in March as a result of the coronavirus pandemic and its dramatic impact on the global and U.S. economy. That upheaval may not end anytime soon. Many investors have sought to profit from wild market swings like these through volatility ETFs, many of them linked to the Chicago Board Options Exchange Market Volatility Index (VIX). VIX is a real-time index representing the market's expectation of 30-day forward-looking volatility, as derived from the prices of S&P 500 index options. It provides a measure of market risk and investor sentiment, and is popularly known as the "fear index."

Key Takeaways

  • The VIX has spiked in 2020, rising 63% during the past 12 months.
  • The three VIX ETFs, ranked according to 1-year trailing total return, are VIXM, VXX, and VIXY.
  • All three of these ETFs hold futures contracts to track market volatility.

VIX ETFs provide sophisticated investors with the ability to track market volatility using VIX futures contracts. The price of these funds will rise and fall in tandem with volatility but at different rates depending on how they are constructed. These ETFs are usually held over relatively short periods to take advantage of rapid changes in volatility, rather than as part of a long-term buy-and-hold investing strategy.

There are 3 VIX ETFs that trade in the U.S., excluding inverse and leveraged funds as well as those with under $50 million in assets under management (AUM). Over the past 12 months, the VIX has risen 63%, peaking earlier this the year and continuing to show huge volatility amid the COVID-19 pandemic. The Russell 1000's total return was 19.4% as of November 30. The best VIX ETF, based on performance over the past year, is the ProShares VIX Mid-Term Futures ETF (VIXM). We examine the 3 VIX ETFs below. Aside from performance figures above, all numbers in this story are as of December 2, 2020.

ProShares VIX Mid-Term Futures ETF (VIXM)

  • Performance over 1-Year: 58.9%
  • Expense Ratio: 0.87%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 71,938
  • Assets Under Management: $81.2 million
  • Inception Date: January 3, 2011
  • Issuer: ProShares

VIXM is structured as a commodity pool, a type of private investment structure also known as a managed futures fund. The fund tracks the S&P 500 VIX Mid-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts having a weighted average of five months to expiration. VIXM holds CBOE VIX futures contracts in order to provide investors with returns based on increases in the expected volatility of the S&P 500. This ETF holds relatively longer-dated futures contracts. The fund does not track the VIX and should be expected to perform very differently from the fear gauge. It is intended for sophisticated investors with a short-term investment horizon and who are able to monitor their investments on a daily basis. 

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)

  • Performance over 1-Year: -0.3%
  • Expense Ratio: 0.89%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 36,467,936
  • Assets Under Management: $952.3 million
  • Inception Date: January 17, 2018
  • Issuer: Barclays Capital

VXX is structured as an exchange-traded note (ETN), a special type of debt instrument that does not make interest payments and which trades on market exchanges similar to stocks. Because it's an ETN, VXX avoids tracking error but may leave investors exposed to credit risk. VXX tracks the S&P 500 VIX Short-Term Futures Index Total Return, offering exposure to a daily rolling long position in the first and second month VIX futures contracts. Like VIXM above, VXX does not represent a spot investment in the VIX, but instead is linked to an index comprised of VIX futures. As a result, it may perform very differently from the fear gauge as well. The fund is aimed at sophisticated investors seeking specific exposure to volatility and who are able to monitor their positions closely.

ProShares VIX Short-Term Futures ETF (VIXY)

  • Performance over 1-Year: -0.9%
  • Expense Ratio: 0.87%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 5,276,854
  • Assets Under Management: $284.5 million
  • Inception Date: January 3, 2011
  • Issuer: ProShares

Like VIXM above, VIXY is also structured as a commodity pool. The fund tracks the S&P 500 VIX Short-Term Futures Index, which follows the movements of a combination of VIX futures and is designed to track changes in the expectation for VIX over a specific short-term time window. The fund holds shorter-dated CBOE VIX futures contracts. Like the other funds on this list, VIXY is geared toward sophisticated investors with a short-term focus.

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