Volatility surged to the highest levels since 2008 in March of last year as a result of the coronavirus pandemic and its dramatic impact on the global and U.S. economy. It has since moderated but remains at elevated levels compared to before the pandemic. 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 spiked in March 2020 and remains at historically elevated levels although it has lessened over the past year.
  • 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.

The VIX cannot be invested in directly, but sophisticated investors can use VIX ETFs to track market volatility via holdings of 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). The VIX has fallen 37.8% from dramatically heightened levels reached 12 months ago. The S&P 500's total return over that same year-long period is 29.3%, as of March 5, 2021. While sophisticated investors tend to trade VIX ETFs on a very short-term basis, the best performing VIX ETF on an annual basis is the ProShares VIX Mid-Term Futures ETF (VIXM). We examine the 3 VIX ETFs below. All numbers for each ETF below are as of March 8, 2021.

ProShares VIX Mid-Term Futures ETF (VIXM)

  • Performance over 1-Year: 54.8%
  • Expense Ratio: 0.87%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 82,918
  • Assets Under Management: $93.2 million
  • Inception Date: January 3, 2011
  • Issuer: ProShares

VIXM is structured as a commodity pool, a type of private investment that combines investor contributions to trade commodities futures and options. 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: -43.3%
  • Expense Ratio: 0.89%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 55,315,760
  • Assets Under Management: $1.6 billion
  • 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. It is not intended for use as a long-term investment.

ProShares VIX Short-Term Futures ETF (VIXY)

  • Performance over 1-Year: -43.7%
  • Expense Ratio: 0.87%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 8,211,160
  • Assets Under Management: $428.3 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 in order to provide exposure to equity market volatility. Like the other funds on this list, VIXY is geared toward sophisticated investors with a short-term focus.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.