In a year market by market volatility, it is not a surprise to find that some of the best performing ETFs of 2018 are not the typical stock market categories of yesteryear.
Among the best performing non-leveraged exchange traded products of 2018, strategies that track the VIX or CBOE Volatility Index, a gauge of market fear, topped the list. Year-to-date, the iPath B S&P 500 VIX S/T Futs ETN (BATS: VXXB) jumped 56.4%, VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) surged 53.0%, iPath S&P 500 VIX ST Futures ETN (NYSEArca: VXX) advanced 52.7%, ProShares VIX Short-Term Futures (NYSEArca: VIXY) increased 51.7%, iPath Series B S&P 500 VIX Mid-Term Futures ETNs (VXZB) gained 31.5%, iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ) added 27.4% and ProShares VIX Mid-Term Futures (NYSEArca: VIXM) rose 26.9%.
The VIX is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. ETFs that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns.
If investors want to hedge against any market risks or bet on volatile turns, people would typically utilize VIX futures, which are priced based on the forward value of the VIX. Since investors can’t invest in the VIX Index itself, many typically use futures to hedge positions.
Investors should note that VIX futures are not the same as the VIX spot price. 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.
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.