The VIX (CBOE Volatility Index) was created in 1993 to measure the 30-day implied volatility using at-the-money S&P 100 Index option prices. In 2003, the VIX was calculated based on the S&P 500 Index, and it seeks to estimate future volatility by averaging the weighted prices of S&P 500 options over an array of strike prices. Rather than trading options or futures on VIX, sophisticated investors may consider exchange-traded products (ETPs) linked to the VIX, such as the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEARCA: XIV) and the ProShares Short VIX Short-Term Futures ETF (NYSEARCA: SVXY).
VelocityShares Daily Inverse VIX Short-Term ETN
The VelocityShares Daily Inverse VIX Short-Term ETN was issued by Credit Suisse Group AG (NYSE: CS) on Nov. 29, 2010. As of November 2, 2016, the fund had approximately 14.18 million exchange-traded notes (ETN) outstanding and total assets of $505.05 million according to VelocityShares and Morningstar. It charged an annual net expense ratio of 1.35%, which is at the higher end of the range of fees charged in this category. This fund seeks to provide exposure that is one times the inverse of the daily performance of the S&P 500 VIX Short-Term Futures Index ER. The index measures the return from rolling long positions in first- and second-month VIX futures contracts, and rolls each first month VIX futures position into the second month futures contracts.
As of Sep. 29, 2016, based on trailing three-year data from Yahoo Finance, the ETN had an R-squared of 88.17%, relative to its best-fit index, the S&P 500 VIX Short-Term Futures TR USD Index. This figure indicates 88.17% of the fund's past price movements can be explained by movements in the index. The ETN has a beta of -0.93, relative to the index over the same period, which indicates the fund has a strong negative correlation to its best-fit index. The fund's negative beta indicates that it is likely to decrease as its best-fit index increases, and vice versa. The ETN is best suited for short-term investors or traders with high risk tolerances who wish to only gain inverse daily exposure to the S&P 500 VIX Short-Term Futures Index ER.
ProShares Short VIX Short-Term Futures ETF
The Short VIX Short-Term Futures ETF was issued by ProShares on Oct. 3, 2011. As of September 30, 2016, the fund had total net assets of $504.71 million and charged an expense ratio of 0.95% not including brokerage commissions and related fees according to ProShares fund fact sheet. It seeks investment results that are one times the inverse of the daily performance of the S&P 500 VIX Short-Term Futures Index. This fund and the VelocityShares ETN have a similar objective, but the latter is an unsecured debt note issued by Credit Suisse, while the former is a fund that holds the assets related to its underlying index.
The Short VIX Short-Term Futures ETF and the VelocityShares ETN have nearly identical modern portfolio theory (MPT) statistics. As of Sep. 29, 2016, based on trailing three-year data from Yahoo Finance relative to the S&P 500 VIX Short-Term Futures TR USD, the ProShares fund has an R-squared of 88.19% and a beta of -0.93. The R-squared value suggests that 88.19% of the fund's past price movements over the three-year period can be explained by movements in its best-fit index. The fund's beta of -0.93 indicates it has a strong negative correlation to its best-fit index.
Since the ProShares ETF and the VelocityShares ETN have the same investment objectives and similar MPT statistics, the ETF is best suited for highly risk tolerant investors who wish to gain inverse exposure to the daily performance of the VIX Short-Term Futures Index, but with a lower degree of credit risk than an ETN.
