Putting the VIX to Work
VIX futures began trading in 2004, and with the advent of futures-based ETFs and ETNs, the average retail investor is now able to gain access to VIX options.
The VIX can be a useful trading tool to help provide opportunities for hedging, speculation and even portfolio diversification. Due to the nature of its construction, the VIX has a negative correlation with the S&P 500.
The first VIX products were ETNs that provide short-term traders exposure for hedging equity positions or speculating on spikes in stocks. The ETNs don’t actually track the VIX index itself, they track a basket of rolling volatility futures. As a result, there may be a noticeable disparity between futures-based VIX ETPs and the spot price of the VIX.
Holding the ETNs for the long-term may lose some of its performance do to the contango in the VIX futures market. Contango is when contracts are rolled and the long-term futures are more expensive than near month expirations translating to higher “roll yields.”
The number of VIX products has exploded in recent years. The two ETF options track mid-and short-term VIX futures: ProShares VIX Short-Term Futures (NYSEArca: VIXY) and ProShares VIX Mid-Term Futures (NYSEArca: VIXM). There are also a number of ETNs through which investors can get their exposure including:
- iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX)
- iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ)
- VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV)
- VelocityShares Daily Inverse VIX Medium-Term ETN (NYSEArca: ZIV)
- UBS E-TRACS Daily Long-Short VIX ETN (NYSEArca: XVIX)
Additionally, investors may play on the added exposure in leveraged ETN options:
- VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX)
- Daily 2X VIX Medium-Term ETN (NYSEArca: TVIZ)