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 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 32.7% during the past 12 months.
  • The VIX ETFs with the best 1-year trailing total return are XVZ, VXZ, and VIXM.
  • All three of these ETFs hold CBOE VIX 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 about 5 VIX ETFs, excluding inverse ETFs. Over the past 12 months, the VIX has risen 32.7% while the S&P 500's total return was 22.1%. The best VIX ETF, based on performance over the past year, is the iPath S&P 500 Dynamic VIX ETN (XVZ). We examine the top 3 best VIX ETFs below. All numbers in this story are as of August 31, 2020.

ETFs with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs which can negate some of your investment gains or increase your losses.

iPath S&P 500 Dynamic VIX ETN (XVZ)

  • Performance over 1-Year: 124.9%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 2,917
  • Assets Under Management: $9.9 million
  • Inception Date: August 17, 2011
  • Issuer: Barclays Capital

XVZ 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. The fund is an unsecured debt obligation of its issuer and carries associated counterparty risk. XVZ tracks the S&P 500 Dynamic VIX Futures Total Return Index. It varies its holdings of short-term futures contracts and mid-term futures contracts depending on the implied slope of the VIX futures curve. The fund is aimed at sophisticated investors seeking specific exposure to volatility and who are able to monitor their positions closely. 

iPath Series B S&P 500® VIX Mid-Term Futures ETN (VXZ)

  • Performance over 1-Year: 68.2%
  • Expense Ratio: 0.89%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 17,961
  • Assets Under Management: $30.2 million
  • Inception Date: January 17, 2018
  • Issuer: Barclays Capital

VXZ is also structured as an ETN, which is an unsecured debt obligation of its issuer. The fund tracks the S&P 500 VIX Mid-Term Futures Index Total Return, and which offers exposure to a daily rolling long position in the four-to-seven month range of VIX futures contracts. The fund holds longer-dated CBOE VIX futures contracts. As a result, it exhibits diminished correlation with the spot VIX, but is less likely to be affected by contango-related return erosion characteristic of short-term products. This does not mean the fund is geared toward long-term investment strategies. It is meant for sophisticated investors with a short-term focus and is likely to lose value when held over the long run. 

ProShares VIX Mid-Term Futures ETF (VIXM)

  • Performance over 1-Year: 67.9%
  • Expense Ratio: 0.87%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 56,642
  • Assets Under Management: $90.2 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. Similar to VXZ, 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.