Going Long VIX ETFs Was a Good Play for 2018 | Page 2 of 2 | ETF Trends

Volatility typically rises when stocks pullback, so owning volatility is seen as a type of market insurance. However, the play comes with a cost.

“Usually it costs a lot to own volatility,” Jim Carney, chief executive officer at hedge fund Parplus Partners, told Reuters.

Volatility- or VIX-related ETPs typically track the futures market, so they can lose value quickly during calm or bullish market conditions since VIX futures are almost always in a perpetual state of contango – a condition when later-dated contracts cost more than near-term contracts. Consequently, as VIX ETPs roll their contracts when the futures near expiry, the products are essentially buying later-dated contracts at a high and selling near-expiry contracts at a low.

“When the front month VIX future is below the second month there’s a huge cost to owning the product, but now with the front month around the same level of the second month, or above it, there is no cost,” Carney added.