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 relatively high compared to before the pandemic. Many investors have sought to profit from wild market swings 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 ETFs with the best 1-year trailing total return are VXZ, VIXM, and VXX.
  • 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, as opposed to being part of a long-term, buy-and-hold investing strategy. They are very complex sorts of financial instruments and not intended for beginner investors.

There are 4 VIX ETFs that trade in the U.S., excluding inverse and leveraged funds. The VIX has fallen 37.6% from dramatically heightened levels reached 12 months ago. The S&P 500's total return over that same year-long period is 31.2%, as of Aug. 31, 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 iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ). We examine the 3 best VIX ETFs below. All numbers for each ETF below are as of Aug. 31, 2021.

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

  • Performance over 1-Year: -23.2%
  • Expense Ratio: 0.89%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 18,692
  • Assets Under Management: $42.3 million
  • Inception Date: Jan. 17, 2018
  • Issuer: Barclays Capital

VXZ is structured as an exchange-traded note (ETN), a type of unsecured debt security that does not make interest payments and has stock-like characteristics. It tracks the S&P 500 VIX Mid-Term Futures Index Total Return, which provides exposure to a daily rolling long position in the fourth, fifth, sixth, and seventh month VIX futures contracts and reflects market participants' views on the future direction of the VIX index. Since the fund is comprised of longer-dated futures contracts, it is likely to exhibit lower correlation with the spot VIX. But it is still only intended for sophisticated investors with a short-term focus. As an ETN, VXZ avoids tracking error but may expose investors to credit risk.

ProShares VIX Mid-Term Futures ETF (VIXM)

  • Performance over 1-Year: -23.8%
  • Expense Ratio: 0.85%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 76,233
  • Assets Under Management: $107.1 million
  • Inception Date: Jan. 4, 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: -76.3%
  • Expense Ratio: 0.89%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 25,408,314
  • Assets Under Management: $979.0 million
  • Inception Date: Jan. 17, 2018
  • Issuer: Barclays Capital

VXX is structured as an ETN. It tracks the S&P 500 VIX Short-Term Futures Index Total Return, which provides exposure to a daily rolling long position in the first and second month VIX futures contracts. The index is reflective of market participants' views of the future direction of the VIX at the time of expiration of the futures contracts that it tracks. Because VXX is comprised of short-term futures contracts, it has a higher correlation to the spot VIX than the other two funds above. However, for the same reason, the fund is more likely to experience the potential adverse impacts of contango. This ETF should never be held in a long-term, buy-and-hold portfolio. It should only be used as a trading instrument for sophisticated investors looking to make a short-term bet on volatility or as a hedging tool.

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