The products are designed to “roll” the contracts over periodically to maintain exposure to VIX futures. They can lose money on this trade when longer-dated contracts are more expensive than the front-month contract, or when markets are said to be in contango. [Double Whammy for Volatility ETFs]
UVXY is a leveraged ETF that seeks 200% of the daily performance of an index of short-term VIX futures contracts. The ETF will trade at its post-split price on Sept. 7.
Leveraged products reset daily so investors won’t get 200% of the index returns over longer periods due to the impact of compounding.
Volatility exchange traded products, which some traders use to hedge, have seen big inflows this year.
“Volatility, as measured by the VIX Index, spikes when markets fall. As such, a volatility product is theoretically an attractive portfolio diversifier, given its strong negative correlation to equity market performance. However, since the VIX Index is uninvestable, volatility products, such as this one, track an index of VIX futures,” writes Morningstar analyst Patricia Oey in a report on UVXY.
“Investors should note that volatility products, both leveraged and unleveraged, are not suitable as long-term holdings because of the futures-related contango issue and the tendency for volatility to mean revert,” she added.
ProShares Ultra VIX Short-Term Futures ETF
Full disclosure: Tom Lydon’s clients own TVIX.