The markets have been getting volatile again – up 100 points here, down 200 there. You can’t stop the big swings, but you can play where the markets believe the VIX will be in the future with a pair of exchange traded notes (ETNs).
The two ETNs allow investors to bet on VIX futures. The CBOE Volatility Index, or the VIX, which is calculated from Standard & Poor’s index options, tracks the markets volatility over the next 30 days. Adam Warner for Daily Options Report explains that VIX futures “bet” on a snapshot of where the VIX will close on the day they expire. That expiration is 30 days before the next month’s SPX expiration, so Feb VIXes expire on Feb. 17th, March VIX on March 17th, and so on.
These ETNs don’t track the VIX itself. What they do is track a basket of volatility futures and produce a negative return where the yield on the cash that serves as collateral for the futures softens the blow. The two funds are linked to investor sentiment, and being futures-based, they don’t track the VIX on a day-to-day basis. [Will ETF Investors Put Their Money on Risk?]
The two ETNs correlate well to the VIX: iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) has a 0.87 correlation, while iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ) has a 0.83 correlation. They also have a high negative correlation to the S&P 500.
Together, the two funds have attracted heavy investor interest: assets in both total more than $1 billion. [How to Hedge Volatility with an ETN.]
Note that, as ETNs, these funds are debt backed by the full faith and credit of the issuer.
- iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX)
- iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.