Knowing the Market

“The thing to do is understand what is is you’re buying and the reaction of what the market you’re going to buy is going to be,” Warren says.

Buying the VIX as a hedge in volatile markets is a useful application, but Warren cautions investors who think that they’ll make money on the products.

“If you think the VIX is going to go up in value, you think the stock market is going to go down in value,” says Warren. It all comes down to understanding which side of the bet you’re taking and what its impact could be on your portfolio.

VIX Products Available

The number of VIX products has rapidly expanded in the last year, allowing investors to take a variety of stances on the direction of the index. ProShares came to market with the first VIX ETFs earlier this year with ProShares VIX Short-Term Futures (NYSEArca: VIXY) and ProShares VIX Mid-Term Futures (NYSEArca: VIXM); until then, the products had all been ETNs. Here’s the difference between ETFs and ETNs.

VelocityShares has a series of ETNs tracking the VIX, which are issued by Credit Suisse. They range from the inverse VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV), to the long-only VelocityShares VIX Medium-Term ETN (NYSEArca: VIIZ) to the leveraged with VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX).

iPath and UBS also offer leveraged and inverse VIX funds, such as iPath S&P 500 VIX Short-Term Futures (NYSEArca: VXX), iPath Inverse S&P 500 VIX Short-Term Futures ETN (NYSEArca: XXV), and UBS E-TRACS Daily Long-Short VIX ETN (XVIX).