CBOE Volatility Index, or VIX, exchange traded funds track the futures and suffer when the market is stuck in contango. However, inverse VIX ETFs are capitalizing on the phenomenon, steadily strengthening on the quirk in the markets.
For example, the bearish or inverse VIX ETF, the REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (BATS: VMIN), has achieved a total return of 81.04% from its launch on May 2, 2016 through December 31, 2016. In contrast, the VIX performance over the same period was -3.95%.
VMIN capitalized on rolling short VIX futures contracts, according to REX Shares.
“Taking short VIX positions via ETFs is continuing to grow in popularity,” Greg King, founder and CEO of REX Shares, said in a note. “Many people think of volatility funds as having a significant decay in price. While this is generally true of long volatility funds, VMIN takes the other side of that exposure, potentially benefiting from such decay as it accrues in exchange for bearing the risks associated with spikes in volatility. Investors we speak to are often looking to buy the dips in short volatility ETFs as a way to play volatility spikes.”
REX Shares has two VIX-related ETFs, the REX VolMAXX Long VIX Weekly Futures Strategy ETF (BATS: VMAX) and the REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (BATS: VMIN). The two funds provide 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.
Potential investors should be aware that these VIX exchange traded products track the futures market and not the spot price of the VIX. Since the ETPs track the futures market, investors will be exposed to issues like contango.
The ETPs that track something like the S&P 500 VIX Short Term Futures Index roll 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, which has contributed to the long-term underperformance of VIX futures index-based ETPs.
However, the bearish or short VIX ETPs, like VMIN, have capitalized on the negative effects of contango in the futures market over extended periods.
For more information on the CBOE Volatility Index, visit our VIX category.