Get a Better Grasp of Market Volatility and VIX ETFs

Bill Luby, Chief Investment Officer of Luby Asset Management, explained that over the short-term, VIX ETP prices are determined by volatility, but over the long-run, term structure or the negative effects of contango will determine VIX ETP prices.

“In the S&P 500 VIX Short-Term Futures Index, a positive roll cost occurs on 76% of days, with an average daily loss of 0.18%,” Srivastava said. “In the S&P 500 VIX Mid-Term Futures Index, a positive roll cost occurs on 64% of days, with a lower average daily loss of 0.07%.”

Volatility traders who are interested in short-term moves may be focused on more near-term VIX futures, which have shown a greater sensitivity to short-term VIX spot moves.

“High beta makes VIX ETPs darlings of day traders focusing on directional changes,” Luby said.

Consequently, King argued that traders may be more interested in short-dated VIX ETP exposure, such as the REX VolMAXX Long VIX Weekly Futures Strategy ETF (BATS: VMAX) and the REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (BATS: VMIN) to gain exposure to VIX up and down movements, respectively. The VolMAXX funds have a target weighted average time to expiration of less than 30 days by accessing VIX weekly futures, unlike other ETP options that utilize monthly contracts.

“More frequent expirations allow for consistent short dated exposure,” King said.

Financial advisors are seeking VIX ETPs that more closely track the VIX Index. In a survey of advisors on the webcast, 84.0% of respondents said they are more likely to trade a volatility ETF that was more highly correlated with the VIX.

Financial advisors who are interested in learning more about the CBOE Volatility index can watch the webcast here on demand.