Last updated on April 1st, 2022 , 05:48 am
In March 2022, Barclays suspended sales of its wildly popular iPath Series B S&P 500 VIX Short-Term Futures ETN, better known as VXX.
Though it will be hard in the short term for competitive ETFs (and ETNs) to match VXXs liquidity, there are indeed alternatives to Barclay’s VXX ETF.
All market volatility products in this article come with significant risks. To learn more about these risks, read this alert from the SEC.
Let’s fly over a few of the different futures-based volatility ETFs investors have before analyzing and comparing them individually.
UVXY: ProShares Ultra VIX Short-Term Futures ETF
VIXY: ProShares VIX Short-Term Futures ETF
VIXM: ProShares VIX Mid-Term Futures ETF
VXZ: iPath Series B S&P 500® VIX Mid-Term Futures ETN
SVXY: ProShares Short VIX Short-Term Futures ETF
UVXY vs VIXY vs VIXM vs VXZ vs SVXY
| UVXY | VIXY | VIXM | VXZ | SVXY | |
|---|---|---|---|---|---|
|
Fund Name: |
ProShares Ultra VIX Short-Term Futures ETF |
ProShares VIX Short-Term Futures ETF |
ProShares VIX Mid-Term Futures ETF |
iPath Series B S&P 500 VIX Mid-Term Futures ETN |
ProShares Short VIX Short-Term Futures ETF |
|
Market Direction: |
Long |
Long |
Long |
Long |
Short |
|
Leverage Ratio: |
1.5X Leverage |
1x Leverage |
1x Leverage |
1x Leverage |
.5x Leverage |
|
VIX Duration Structure: |
Short-Term Futures |
Short-Term Futures |
Mid-Term Futures |
Mid-Term Futures |
Short-Term Futures |
|
Average Volume: |
82,945,752 |
9,124,628 |
146,211 |
56,690 |
5,823,345 |
|
AUM (Assets Under Management): |
$840.39M |
$363.87M |
$108.19M |
$65.58M |
$425.01M |
|
Expense Ratio: |
0.95% |
0.85% |
0.85% |
0.89% |
0.95% |
How does the UVXY ETF work?
- ProShares UVXY ETF (exchange-traded fund) rises in value with increases in the expected volatility of the S&P 500 as measured by VIX futures; UVXY does NOT track the VIX (aka “fear index”) directly.
- UVXY tracks the return of numerous VIX futures with a weighted average time until expiration of one month.
- UVXY seeks a leveraged return 1.5x the return of the short-term VIX futures index it tracks on a daily basis.
- Due to the compounding of returns, positon’s held in UVXY for more than a single day can deviate greatly from the benchmark.
- “Roll Yield” contributes to UVXY’s profound decay.
Out of all the funds on our list, UVXY is the most liquid. With an average of 83 million shares traded every day, traders should have little slippage entering and exiting positions. Also worth noting is the funds very high expense ratio of 0.95%!
Like most funds on our list, ProShares UVXY ETF tracks the S&P 500 Short-Term VIX Futures Index. Let’s first see how ProShares describes their fund in the ETFs prospectus:
Since VIX Futures expire regularly, short-term futures ETFs must contain more than one contract to provide their average one to expiration ideal holdings. Let’s see what’s under the hood next.
UVXY Holdings and Performance
The below image, taken from ProShares’ prospectus of UVXY, shows the funds current holding:
We can see that UVXY currently has a larger position in VIX April futures than VIX May futures (far right side of the above image). As time advances, and the April expiration approaches, the position will be increasingly rolled out to May.
UVXY is the only leveraged ETF on our list. What the fund does not list in its holdings are the securities they utilize to achieve this leverage.
However, we can read in the prospectus that ProShares implements derivatives, such as “swaps”, to achieve this leverage.
Due to the nature of both swaps and contango, UVXY perpetually sheds value, as can be seen in the below one-year performance chart.
Want to learn how Contango works? Check out our article on Contango written by Chris Butler!
UVXY One Year Chart
If you’d like an in-depth review of UVXY, please check out our article, “UVXY: What Is It and Is It Worth The Risk?“
How does the VIXY ETF work?
- ProShares VIX Short-Term Futures ETF (VIXY) rises in value with increases in the expected volatility of the S&P 500 measured by VIX futures contracts.
- VIXY is NOT a leveraged ETF but aims for a 1x return of its benchmark, the VIX Short-Term Futures Index VIX.
- Like UVXY, VIXY uses futures with a weighted average of one month to expiration.
- Like UVXY, VIXY is intended for short-term use; over a period of more than one day, the ETF often fails to track the index adequately because of contango.
VIXY has a lot in common with UVXY, with three notable exceptions:
UVXY vs VIXY: 3 Differences
- Unlike UVXY, VIXY is not a leveraged product, and decays less over time because of this.
- VIXY is less liquid than UVXY.
- VIXY charges a fee of 0.85%, which is less than UVXY’s fee of 0.95%.
If you understand UVXY, you should have a pretty good idea of how VIXY works. The only difference is this fund is not leveraged. Let’s take a quick look at how ProShares describes their fund, then move on to the holdings and performance of UVXY.
VIXY Holdings and Performance
The below image, taken from ProShares’ prospectus of VIXY, shows the funds current holding:
ProShares VIX short-term futures ETF (VIXY) is very similar in nature to UVXY.
We can see they are currently invested in both April and May VIX futures. The proportion of these two months is also nearly the same. VIXY, however, has a lesser quantity of VIX futures than UVXY. Why? Because VIXY is not as popular as UVXY.
Let’s compare the two next. Remember, UVXY is a leveraged ETF (1.5x), VIXY is not!
UVXY vs VIXY: One Year Chart
The above chart shows just how much faster the leveraged UVXY ETF decays when compared to VIXY. This is due of course to the leverage of 1.5 that UVXY utilizes.
In addition to contango, leveraged ETFs also decay because of their derivative nature. Double whammy!
Short-Term vs. Mid-Term Volatility ETFs
The next two funds we will be reviewing both track the performance of the S&P 500 VIX Mid-Term Futures Index. Though the short-term and mid-term VIX Indices are indeed similar (CBOE ticker SPVIXSTR and SPVIXMTR respectively), there are some important differences in the structure and performance of volatility products the track them:
- Short-term ETFs decay more rapidly than mid-term ETFs.
- Short-Term VIX ETFs incorporate two VIX futures expirations.
- Mid-Term VIX ETFs incorporate four VIX futures expirations.
Let’s jump into ProShares mid-term volatility ETF (VIXM) first.
How does the VIXM ETF work?
- ProShares VIX Short-Term Futures ETF (VIXM) rises with increases in the expected volatility of the S&P 500, as measured by the prices of VIX futures contracts.
- VIXM is NOT a leveraged ETF.
- VIXM aims to provide long exposure to the S&P 500 VIX Mid-Term Futures Index.
- The Mid-Term Futures Index is a portfolio of monthly VIX futures contracts with an average of five months to expiration.
As stated by ProShares, the VIXM ETF aims to:
In order to fully understand how VIXM differs from VIXY, we must dive into the funds holdings:
VIXM Holdings and Performance
The below image, taken from ProShares’ prospectus of VIXM, shows the funds current holdings:
As we can see, this ETF has positions in July, August, September, and October futures contracts.
The result is a weighted average of five months to expiration.
So what effect does this more time-diverse product have on the performance of VIXM? Let’s look at a 5-year chart comparing VIXM with its short-term futures ETF counterpart, VIXY:
As the above image clearly shows, the short-term futures ETF VIXY erodes at a far greater pace than the mid-term futures ETF VIXM.
Why is this? Contango! When futures are rolled, sometimes a premium must be paid above the spot price to do this. This premium is far greater in short-term futures than mid-term futures.
The below image (from spreadcharts.com) shows the cost of contango for short-term futures (gold) and longer-term futures (blue).
How does the VXZ ETF work?
- iPath’s Series B S&P 500® VIX Mid-Term Futures ETN (VXZ) is designed to provide exposure to the S&P 500 VIX Mid-Term Futures underlying Index
- VXZ is classified as an ETN (exchange-traded note)
- VXZ performs similar to VIXM
As stated by the funds prospectus, VXZ aims to:
iPath’s Series B S&P VIX Mid-Term Futures ETF VXZ (issued by Barclays Capital) has a lot in common with VIXM.
One ostensible difference is in the funds’ nomenclature: VXZ is called an ETN. ProShares calls their funds ETFs. The truth is all futures-based ETPs (exchange-traded products) are ETNs. Good for iPath for calling a spade a spade! So what’s the difference between an ETN and an ETF?
Basically, an ETN is a debt security issued by a bank. ETNs don’t pay dividends and therefore have tax advantages (there are no dividends to tax).
If you’d like to compare the differences between ETNs and ETFs in-depth, check out our article, “ETN vs ETP vs ETC vs ETF“.
But, again, all the “funds” listed in this article are ETNs. ETFs generally perform more like mutual funds in that most have equity exposure.
VXZ is an inferior product to VIXM in almost every way. Here are a few
VIXM vs. VXZ: 3 Differences
- VXZ charges a fee of 0.89%; VIXM charges a fee of 0.85%.
- VIXM trades an average of 150k shares/day; VXZ trades an average of 56k shares/day.
- VXM option markets are incredibly wide.
Options traders should avoid VXZ at all costs. Limit orders are essential here.
Why? In addition to VXZs low open interest and volume, you could park a truck between the bid/ask spread!
Take a look at the current options markets for VXZ calls and puts on tastyworks:
VIXM vs VXZ: Performance
Let’s end our mid-term futures-based ETFs segment by taking a look at the historical 3-year performance of ProShares’ VIXM (blue) and iPaths’ VXZ (grey) ETNs. As you can see, they perform almost the exact same.
Chart from barchart.com
How does the SVXY ETF work?
- ProShares Short VIX Short-Term Futures ETF (SVXY) is benchmarked to the S&P 500 VIX Short-Term Futures Index.
- SVXY is a SHORT ETF, meaning this product rises in value when volatility decreases.
- SVXY attempts to replicate -0.5x the return of the S&P VIX Short-Term Futures Index.
Last on our list is an inverse fund: ProShares SVXY. SVXY is currently the only inverse volatility ETF in existence. Here is how ProShares describes their fund in the prospectus:
SVXY Holdings and Performance
The below image, taken from the prospectus of ProShares Short VIX Short-Term Futures ETF (SVXY), shows the funds current holdings.
The holdings of SVXY are very similar to those of UVXY and VIXY. The one notable exception is that the futures contracts held with SVXY are short, not long.
Not shown in the holdings are SVXYs leverage structure: this fund shorts the S&P 500 VIX Short-Term Futures Index at half leverage.
As we said before, because of contango, short-term (and mid-term) futures-based ETFs are a bad idea. So if buying them is a poor investment, wouldn’t selling them be a good idea? Sometimes. And this is the reason behind SVXYs high trading volume.
Let’s compare a 5-year chart of SVXY to VIXY. Remember, SVXY is leveraged at a 0.5x ratio while VIXY is leveraged at a 1x ratio.
One Year Chart: SVXY vs VIXY
Based only on this chart, SVXY may seem like a decent long-term investment.
Let’s compare the same ETFs, but let’s now extend the chart to 5 years.
Five Year Chart: SVXY vs VIXY
Pay particular attention to what happened in 2018. This event was known as “Volpocalypse“.
This event occurred in February of 2018 when the VIX doubled and the markets tanked.
I was working with several advisors during this time that were short put options in SVXY. Needless to say, it was a bad day for them!
UVIX vs SVIX
On the tail of Barclay’s shutting down VXX, Volatility Shares announced the launch of to two new products:
The 2x Long VIX Futures ETF (Ticker: UVIX) seeks to provide daily investment results, before fees and expenses, that correspond to 2x the Long VIX Futures Index (Ticker: LONGVOL).
➥Want to learn more about this ETF? Check out our article, What is UVIX?
The -1x Short VIX Futures ETF (Ticker: SVIX) seeks to provide daily investment results, before fees and expenses, that correspond to the Short VIX Futures Index (Ticker: SHORTVOL).
➥ Want to learn more about this ETF? Check out our article, What is SVIX?
Risks of VIX ETFs
Let’s conclude the article by going over two major risks that volatility-based products introduce to traders:
1.) Volatility ETFs Do No Track the VIX
Because of contango and backwardation, volatility ETFs diverge substantially from the VIX spot index.
2.) Volatility ETFs Shed Value Persistently
In normal markets, volatility ETFs perpetually decline in value. The exception here of course is SVXY, but after learning about “volpocalypse” we can see that not even these products are safe!
