Since the VIX acts on market fear, observers will notice that the VIX tends to show a negative correlation to the overall performance of the U.S. equities markets. As such, traders may utilize this contrarian investment tool to estimate market tops or bottoms on a short-term basis. However, high market volatility does not necessarily translate into a market bottoming out, although it does signal extreme duress in the markets.
During times of low volatility, the VIX will trade in a state of contango since the future is unknown and the higher prices will reflect greater potential volatility, whereas the VIX will trade in backwardation if the markets are currently experiencing high volatility since high levels of volatility will not last forever. As such, VIX-related funds tend to be much more profitable during times of high market volatility with the futures market undergoing backwardation. [Backwardation and Contango]
VIX exchange traded note options include:
- iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX)
- iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ)
- iPath Inverse S&P 500 VIX Short-Term Futures ETN (NYSEArca: XXV)
- iPath Inverse S&P 500 VIX Short-Term Futures ETN II (NYSEArca: IVOP)
- iPath S&P 500 Dynamic VIX ETN (NYSEArca: XVZ)
- VelocityShares VIX Short-Term ETN (NYSEArca: VIIX)
- VelocityShares VIX Medium-Term ETN (NYSEArca: VIIZ)
- VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV)
- VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX)
- VelocityShares Daily Inverse VIX Medium-Term ETN (NYSEArca: ZIV)
- VelocityShares Daily 2x VIX Medium-Term ETN (NYSEArca: TVIZ)
- UBS E-TRACS Daily Long-Short VIX ETN (NYSEArca: XVIX)
ETF options include:
- ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY)
- ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY)
- ProShares Ultra VIX Short-Term Futures ETF (NYSEArca: UVXY)
- ProShares VIX Mid-Term Futures ETF (NYSEArca: VIXM)
For past stories in this series, visit our “What is an ETF?” category.
Max Chen contributed to this article.