Contango Helps Inverse VIX ETFs Outperform

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.