We have spoken about the general uptick in trading volume and in some cases flows activity in the Volatility category of ETPs in the past few weeks, and it makes sense to further explore a volatility related product that is likely not on many radars due to general “newness” of the fund to the marketplace.

VSPY (Direxion S&P 500 RC Volatility Response Shares, Expense Ratio 0.45%) launched in January of 2012 and toiled for some time with low trading volume, but activity in this fund has notably picked up in recent weeks, now averaging about 37,000 shares traded daily.

To clarify exactly what this fund does and how it is structured, VSPY is categorized in the “Large Cap Blend Equity” category, and tracks the S&P 500 Dynamic Rebalancing Risk Control Index, which is likely foreign to most.

Delving into fund literature, the fund “aims to provide improved risk/return profile relative to traditional beta investing by: 1) increasing equity exposure during periods of low volatility to exploit positive trends 2) employing a downside risk mitigation strategy during periods of high volatility and 3) applying a disciplined strategic index-based methodology to an equity investment strategy.”

So what we have here is not a “Volatility” product in that it is using futures for exposure to Volatility itself, but this is an equity product (that can also go into T Bills) that adjusts to changing volatility levels in the marketplace dynamically, at least according to design.

The literature furthermore states that “VSPY’s exposure to equities within the S&P 500 Index is determined using a target volatility level. 1) The index establishes a volatility target which may be set at 12.5%, 15%, or 18=7.5%, and is determined based on the recent levels of CBOE Volatility Index (VIX).

The Index then reviews several volatility factors of the S&P 500 Index.” So in simple terms, there appears to be a two layered examination of volatility as interpreted by standard VIX measures, followed by an individual examination of actual volatility in the S&P 500 Index itself.

The index is further described with “the volatility factors of the S&P 500 Index are exponentially weighted with more emphasis placed on the most recent historical periods. Those volatility factors, along with the target volatility levels, determine the Index’s exposure to the equity component and the Treasury Bill component.”