Inverse VIX exchange-traded funds (ETFs) offer investors a straightforward way to bet against the future direction of market volatility. The Chicago Board Options Exchange Market Volatility Index (VIX), also known as the market's "fear gauge," is the most widely used benchmark of volatility. Inverse VIX 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 VIX ETFs falls. But when the uncertainty subsides and optimism returns, volatility falls and this can cause inverse VIX ETFs to rise in value.

Key Takeaways

  • The best (and only) inverse VIX ETF is the SVXY.
  • The VIX has declined substantially over the past year, but it remains at higher levels than the months before the start of the COVID-19 pandemic.
  • SVXY uses futures to provide short exposure to the VIX.

Inverse VIX 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.

There is just one inverse volatility ETF that trades in the U.S.: the ProShares Short VIX Short-Term Futures (SVXY). The VIX has fallen 38.2% from heightened levels reached early last year, but it remains elevated amid ongoing uncertainty due to the COVID-19 pandemic and related economic disruption. There is no benchmark for SVXY as it targets investment results on a daily basis and is not meant to be held long term. But for reference to the broader equity market, the S&P 500 is up 47.8% over the same time period, as of May 17, 2021. We take a closer look at SVXY below. All numbers below are as of May 18, 2021.

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: 47.9%
  • Expense Ratio: 1.38%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 5,171,732
  • Assets Under Management: $544.8 million
  • Inception Date: Oct. 3, 2011
  • Issuer: ProShares

SVXY is structured as a commodity pool, a type of private investment that combines investor contributions to trade commodities futures and options. Part of the complexity of inverse volatility investments is that the VIX cannot be directly purchased or sold. Instead, inverse VIX ETFs 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 daily returns, before fees and expenses, that are equal to -0.5x the daily performance of the S&P 500 VIX Short-Term Futures Index. The fund maintains a daily reset feature leading to the compounding of returns when held over multiple holding periods. It is therefore meant as a short-term trading instrument used by sophisticated investors with a high tolerance for risk, rather than as part of a long-term, buy-and-hold strategy.

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