Inverse volatility exchange-traded funds (ETFs) offer investors a straightforward way to bet against the future direction of market volatility. The most widely used benchmark of volatility is the Chicago Board Options Exchange Market Volatility Index (VIX), also known as the market's "fear gauge". Inverse volatility ETFs make use of complex financial strategies in order to move in the opposite direction of the VIX. Increasing economic uncertainty can cause investor sentiment to turn negative, and this in turn can lead to rising volatility. When volatility rises, the price of inverse volatility ETFs falls. But when the uncertainty subsides and optimism returns, volatility falls and this can cause inverse volatility ETFs to rise in value.

Key Takeaways

  • The best (and only) inverse volatility ETF is the SVXY.
  • The SVXY dramatically underperformed the broader market over the past year.
  • SVXY uses futures to provide short exposure to the VIX.

Inverse volatility ETFs are used mainly by sophisticated traders as part of a broader portfolio involving other highly technical trades. It is important to note that these are highly complex instruments with unique risks. They are intended for investors with very short-term time horizons and should not be used as part of a buy-and-hold strategy. Investors would be wise to carefully consider their own risk tolerance and risk capacity before considering whether to trade such securities.

Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark's one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn't expect it to return 10% in a year when its benchmark falls -10%. For more details, see this SEC alert.

Investors looking to invest in an inverse volatility ETF have just one option: the ProShares Short VIX Short-Term Futures (SVXY). The SVXY has underperformed the broader market with a total return of -29.3% over the past year compared to the S&P 500's total return of 18.0%.  We take a closer look at this fund below. All numbers in this story are as of August 20, 2020.

Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities they represent, and losses can be amplified during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect that they will do so on longer-term returns. For example, a 2x ETF may return 2% on a day when its benchmark rises 1%, but you shouldn't expect it to return 20% in a year when its benchmark rises 10%. For more details, see this SEC alert.

ProShares Short VIX Short-Term Futures (SVXY)

  • Performance over 1-Year: -29.3%
  • Expense Ratio: 1.38%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 3,959,806
  • Assets Under Management: $518.2 million
  • Inception Date: October 3, 2011
  • Issuer: ProShares

Part of the complexity of inverse volatility investments is that the VIX cannot be directly purchased or sold. Instead, inverse volatility funds must short the VIX indirectly. In the case of SVXY, this is done by shorting VIX futures contracts. In doing so, the goal of the fund’s managers is to achieve performance that is equal to -1 times that of the S&P 500 VIX Short-Term Futures Index for each trading day, after deducting their fund management expenses.