Investors should note that VIX futures are not the same as the VIX spot price. However, Hill explained that a VIX futures index has historically been less volatile than the VIX, which may limit risk exposure for traders but also limit potential short-term gains.
“In the last five years, S&P 500 VIX Short-Term Futures Index volatility has been about half that of VIX, ranging from 60% to 80%. S&P 500 VIX Mid-Term Futures Index volatility has been in the range of 25% to 40%,” Hill said.
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Additionally, since the VIX-related indices track futures, the tools may be subject to the negative effects of contango in the futures market. The S&P 500 VIX Short Term Futures Index rolls contracts every day to gain a notional exposure that is always 30 days out. However, since the VIX market is perpetually in a state of contango, where later dated contracts are costlier than near term contracts, the index is selling low and buying high each time it rolls over its contract.
“If the VIX term structure is consistently upward sloping, the return of these futures based indexes will underperform the spot VIX,” Ryan Dofflemeyer, Portfolio Manager at ProShares, said.
Dofflemeyer also outlined a number of VIX-related ETF options to manage market risks, including the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY), ProShares VIX Mid-Term Futures ETF (NYSEArca: VIXM) and ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY). VIXY tracks the S&P 500 VIX Short-Term Futures Index. VIXM tracks the S&P 500 VIX Mid-Term Futures Index. Lastly, UVXY tries to reflect the same underlying index as VIXY.
“The S&P 500 VIX futures indexes are designed such that the mix of futures contracts at any one time maintains a fixed weighted average time to expiration,” Dofflemeyer said. “This is done by rolling a portion of the near contract position out to the far contract position each day. This daily roll may present costs and risks associated with contango and backwardation markets.”
Financial advisors who are interested in learning more about the CBOE Volatility Index can watch the webcast here on demand.