Exchange-traded funds (ETFs) are an increasingly popular way for investors to gain convenient exposure to a wide variety of asset classes. These range from highly popular investments, such as domestic stocks and precious metals, to more specialized trades used by a smaller community of sophisticated investors. A prime example of the latter category is highly risky inverse volatility ETFs. The funds employ complex financial strategies to allow investors to bet against the level of volatility in the market. Successful traders who purchase inverse volatility ETFs expect to see their positions rise in value if the market becomes less volatile.
Inverse volatility ETFs are linked in an an upside-down relationship to volatility futures contracts based on indexes such as the Chicago Board Options Exchange Market Volatility Index (VIX). The prices of these funds move in the opposite direction of the VIX "fear index," rising when volatility falls, and plunging when volatility spikes. Inverse volatility ETFs are used mainly by sophisticated traders who often use them as part of a broader portfolio involving other highly technical trades. It is important to note that these are highly complex instruments that have unique risks. Investors would be wise to carefully consider their own risk tolerance and risk capacity before considering whether to trade such securities.
As of May 16th, 2020, investors who are interested in this asset category have only two inverse volatility ETFs to choose from: the ProShares Short VIX Short-Term Futures ETF (SVXY), and the VelocityShares Daily Inverse VIX Medium Term ETN (ZIV). Both products have had sharply negative performance over the past twelve months, reflecting the fact that market volatility has been relatively high over this time frame.
- Performance over 1-Year: -36.8%
- Expense Ratio: 1.38%
- Annual Dividend Yield: N/A
- 3-Month Average Daily Volume: 6,224,981
- Assets Under Management: $624.9 million
- Inception Date: October 3rd, 2011
- Issuing Company: ProShares
Part of the complexity of inverse volatility investments is that the VIX cannot be directly purchased or sold. Instead, inverse volatility funds must effectively short the VIX indirectly. In the case of the ProShares Short VIX Short-Term Futures ETF (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.
- Performance over 1-Year: -59.7%
- Expense Ratio: 1.35%
- Annual Dividend Yield: N/A
- 3-Month Average Daily Volume: 186,027
- Assets Under Management: $72.9 M
- Inception Date: November 29th, 2010
- Issuing Company: Credit Suisse
The VelocityShares Daily Inverse VIX Medium Term ETN (ZIV) is different from the SVXY inverse ETF in two important respects. First, ZIV is structured as an exchange-traded note (ETN), meaning that it is technically an unsecured debt product. Second, ZIV’s goal is to produce returns that are inversely related to the daily performance of the S&P 500 VIX Medium-Term Futures Index, after fund expenses. Because ZIV is based on the medium-term version of the VIX index, the ETN is exposed to futures contracts that have longer weighted average maturities than those of the SVXY. In both cases, however, the products are intended to be used as very short-term investment vehicles.