Volatility surged to the highest levels since 2008 in March 2020, as a result of the coronavirus pandemic and its dramatic impact on the global and U.S. economies. It then moderated throughout most of 2021 but has fluctuated dramatically in recent months amid Russia's invasion of Ukraine and fears of a recession. Many investors have sought to profit from wild market swings through volatility exchange-traded funds (ETFs), many of them linked to the Cboe 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 (also known as market sentiment) and is popularly known as the “fear index.”
- The Cboe Volatility Index (VIX) spiked in March 2020 and remains at elevated levels amid global supply chain disruptions and Russia's invasion of Ukraine.
- The VIX exchange-traded funds (ETFs) with the best one-year trailing total returns are VXZ, VIXM, and SVOL.
- All three ETFs hold primarily 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 five VIX ETFs that trade in the U.S., excluding inverse and leveraged funds as well as those with less than $50 million in assets under management (AUM). The VIX has risen 35.8% over the past year. The S&P 500’s total return over that same yearlong period is -10.6%, as of Sept. 7, 2022. 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 three best VIX ETFs below. All numbers for each ETF below are as of Sept. 7, 2022. In order to focus on the funds' investment strategy, the top holdings listed for each ETF exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
- Performance Over One-Year: 7.3%
- Expense Ratio: 0.89%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 21,581
- Assets Under Management: $56.7 million
- Inception Date: Jan. 17, 2018
- Issuer: Barclays Capital
VXZ is structured as an exchange-traded note (ETN), an unsecured debt security that makes no 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. Since the fund is composed of longer-dated futures contracts, it is likely to exhibit lower correlation with the spot VIX. But it is still intended only for sophisticated investors with a short-term focus. As an ETN, VXZ avoids tracking error but may expose investors to credit risk.
- Performance Over One-Year: 6.6%
- Expense Ratio: 0.85%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 113,100
- Assets Under Management: $102.7 million
- Inception Date: Jan. 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 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 who are able to monitor their investments daily.
- Performance Over One-Year: -4.4%
- Expense Ratio: 0.54%
- Annual Dividend Yield: 2.17%
- Three-Month Average Daily Volume: 70,825
- Assets Under Management: $108.7 million
- Inception Date: May 12, 2021
- Issuer: Simplify Asset Management Inc.
SVOL is an actively-managed fund that aims to provide results of roughly one-fifth to three-tenths (-0.2x to -0.3x) the inverse of the S&P 500 VIX short-term futures index. Thus, if the index returns -10%, SVOL would aim to provide returns of between 2% and 3%, less fund expenses. The fund utilizes the combination of a short VIX position and options to protect against extreme volatility.
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