VIX is the ticker symbol that represents the Chicago Board Options Exchange Market Volatility Index. The VIX was introduced to measure the severity of the ups and downs of the stock market. While exchange-traded funds (ETFs) typically try to mimic an index of stocks, they can actually attempt to replicate the behavior of any index, including the VIX.
An inverse VIX ETF is one that is used to profit from the opposite of the movements of the VIX. Stock market performance tends to suffer when volatility is high. In fact, the VIX is often called the "fear index." Investors use inverse volatility ETFs to protect their portfolios. But in 2018, products that benefit from weakness in the VIX have been hit hard.
In February, the VIX saw its biggest one-day gain ever, jumping more than 115%; as a result, that knocked out a lot of the value of many of the products that short futures connected to the index. The hit was big enough to cause two of the previous high flyers to shut down entirely: VelocityShares Daily Inverse VIX Short-Term ETN, previously listed as XIV, closed down just after the big slide, shuttering its doors on February 15, 2018; VelocityShares VIX Short Volatility Hedge ETN, previously listed as XIVH, closed down on June 25, 2018.
At least two other products – The ProShares Short VIX Short-Term Futures ETF (SVXY) and the REX VolMAXX Short VIX Futures Strategy ETF (VMIN) – were hit hard, but survived, having been revamped so that they have slightly lower exposure to the VIX than previously. Both are down substantially for 2018.
As recent history has demonstrated, these products can be volatile. Investors will need to keep an eye on the inverse VIX ETFs listed below to figure out when the right time might be to get in, as all are down heavily for the year. Also, it is important to be aware that the lower-volume funds on this list can be difficult to get out of in a hurry, because there may not be buyers available for the shares you offer. All figures are current as of September 10, 2018.
This fund uses the S&P 500 VIX Short-Term Futures Index as its benchmark. It measures a rolling long position and provides an 0.5 inverse exposure to the underlying index versus twice that amount, prior to the recent selloff. In other words, it is not a leveraged ETF. (For more, see: Tracking Volatility: How the VIX Is Calculated.)
- Average Volume: 10,774,412
- Net Assets: $439.46 million
- 2017 Return: 181.84%
- 2018 YTD Return: -88.95%
2. REX VolMAXX Short VIX Futures Strategy ETF (VMIN)
This fund uses the S&P 500 VIX Mid-Term Futures Index as its benchmark. It targets inverse exposure to mid-term VIX futures with between 2 and 6 months left to expiration.
- Average Volume: 63,898
- Net Assets: $9.91 million
- 2017 Return: 53.13%
- 2018 YTD Return: -90.60%
Like VMIN, this fund also uses the S&P 500 VIX Mid-Term Futures index as its benchmark. This fund uses exchange-traded notes to achieve an inverse return on this index.
- Average Volume: 87,211
- Net Assets: $142.27 million
- 2017 Return: -12.33%
- 2018 YTD Return: -18.31%
The Bottom Line
It is important to note that the similar focus of many of these ETFs is not reflected in their performance. The money manager of an inverse VIX ETF is paramount. This is a tricky approach to investing, so it is a good idea to review the personnel who make decisions for the fund and look at their track records.
Investors in inverse volatility ETFs should be aware that sudden large spikes in volatility can cause heavy losses – exactly what happened in February. Understanding how volatility affects stocks requires much study, and investing in an ETF that seeks the inverse of volatility performance is for those who know what changes in volatility mean for the inverse fund's holdings. (See also: Volatility's Impact on Market Returns.)
Because volatility fluctuates regularly, these ETFs are probably best used as short-term plays rather than as long-term investments. (See also: How to Day Trade Volatility ETFs.)