The CBOE Volatility Index plunged Friday and is still hovering around its lowest levels of the year. More skittish investors, though, may interpret this as a sign of growing complacency in the markets and turn to VIX-related exchange traded funds to hedge their positions.
However, potential investors should be aware that these VIX exchange traded products track the futures market and not the spot price of the VIX.
“These products, in general, do exactly what they promise to do,” Dave Nadig, Director of Exchange Traded Funds at FactSet, said in a research note. “They give you highly liquid, easy to access exposure to an incredibly narrow, highly volatile corner of the futures market, based on multi-layered derivative pricing and possibly daily resets (if you’re levered or inverse).”[related_stories]
However, since the ETPs track the futures market, investors will be exposed to issues like contango. Since the last two weeks of August when the VIX spiked above a 50 reading, inverse VIX ETP traders have made a tidy return, but nowhere near the spot price.