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Buy Vix Etf

The name VIX is an abbreviation for "volatility index." Its actual calculation is complicated, but the basic goal is to measure how much volatility investors expect to see in the S&P 500 Index over the next 30 days, based on prices of S&P 500 Index options. When options traders think the stock market is likely to be calm, the VIX is low; when they expect big swings in the market, the VIX tends to go up.

buy vix etf


Like all indexes, the VIX is not something you can buy directly. Moreover, unlike a stock index such as the S&P 500, you can't even buy a basket of underlying components to mimic the VIX. Instead, the only way investors can access the VIX is through futures contracts and through exchange-traded funds (ETFs) and exchange-traded notes (ETNs) that own those futures contracts.

A futures contract is an agreement to deliver something at a certain point in the future, for a price that's agreed upon in the present. The first futures contracts were for commodities such as wheat and corn, and they're available for many commodities now, including oil and natural gas.

Index futures, such as those tied to the value of an index like the S&P 500 or the VIX, do not involve actual delivery of anything when the futures contract matures. Instead, they use a cash delivery tied to the value of the index on the delivery date.

Why is this a problem? Well, imagine that your goal is to always have a certain part of your portfolio invested in VIX futures. If the futures contracts are always more expensive than the current VIX level, then you pay a premium every time you buy futures. You're essentially buying high and selling low, which erodes the value of your investment over time.

The contango problem isn't purely academic; VIX futures contracts have often been more expensive than the VIX index. According to Bloomberg, in 49 of the past 60 months dating back to April 2016, the three-month VIX futures contract was above the VIX level. You can see the effect in action in the chart below.

In this figure, you can see what $10,000 would be worth if it had been invested in the VIX itself (which, as mentioned earlier, is impossible), a portfolio of short-term VIX futures contracts, or a portfolio of medium-term VIX futures contracts over the previous five years. These portfolios are based on actual exchange-traded funds that buy VIX futures contracts.

As you can see, the futures contracts have lagged significantly behind the value of the VIX index. By the end of the period, the value of $10,000 hypothetically invested in the VIX itself would have risen to over $13,000, while the portfolio of medium-term VIX futures contracts was worth under $7,000, and the short-term VIX futures contracts had fallen to under $500. Had an investor actually been able to buy the VIX, the investment would have made some money, but the actual investable instruments based on VIX (including ETFs and ETNs tied to those instruments) lost significant amounts of money.

1The Chicago Board Options Exchange Volatility Index (VIX) reflects a market estimate of future volatility. VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward-looking and is calculated from both calls and puts.

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

Some specialized exchange-traded funds can be subject to additional market risks. Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.

Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value. Commodity-related products are also subject to unique tax implications such as additional tax forms and potentially higher tax rates on certain ETFs.

Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products. Futures accounts are not protected by SIPC. Futures and futures options trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, accuracy, completeness or reliability cannot be guaranteed.

The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (Member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank, SSB (member FDIC and an Equal Housing Lender), provides deposit and lending services and products. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons.

The Chicago Board Options Exchange Volatility Index (VIX index) attracts traders and investors because it often spikes way up when US equity markets plunge. Known as the fear gauge, the VIX index reflects the market's short-term outlook for stock price volatility as derived from options prices on the S&P 500.

In the real world, traders stay in VIX ETFs for 1 day, not 1 year. VIX ETFs are emphatically short-term tactical tools used by traders. Products like VXX, an exchange-traded note (ETN), are incredibly liquid, often trading more than their total assets under management, or AUM, in 1 or 2 days of trading. Traders speculate with VIX ETFs because they offer the best (or least-worst) means to get at the VIX index in the very short run. So-called "short-term" VIX ETFs offer better 1-day sensitivity to the VIX index then do "midterm" VIX ETFs.

VIX ETFs aren't ETFs in the strictest sense. They come in ETN or commodity pool structures, not as traditional mutual funds. ETNs carry the counterparty risk (usually low) of the issuing banks, while commodity pools issue K-1's at tax time.

VIX ETFs come in other flavors than the pure-play described above. VIX overlay ETFs hold broad equity positions and an overlay of VIX futures exposure. They aim to limit downside equity risk but either bear or try to minimize the high cost of long-term VIX futures exposure.

When investors are anxiously buying and selling, causing stock market prices to reach greater highs and lows, the VIX tends to rise. Whereas when markets trade within a narrow range, the VIX remains lower.

If you're wondering whether there is a way to profit from the trends of the VIX, it's important to understand the pros and cons of VIX exchange-traded funds, and take a glimpse at strategies to smooth out the volatility of an all-equity portfolio.

An option is a financial derivative product that gives buyers the right, but not the obligation, to buy or sell the underlying asset at an agreed-upon price before a predetermined date. Options can be used for hedging, income or speculation.

But unlike the SPDR S&P 500 ETF Trust (SPY) or the Invesco QQQ Trust (QQQ), which tracks the returns of the Nasdaq-100, VIX ETFs track VIX futures indexes. "Because you can't invest directly in the VIX, the products available for volatility exposure are only approximations," says Mark Phillips, CEO at Harvested Financial in Chicago.

For short-term traders: ProShares VIX Short-Term Futures ETF (VIXY). This short-term futures ETF attempts to track the S&P 500 VIX Short-Term Futures Index. The futures contracts owned within the fund expire within one month.

This index measures the returns of a portfolio of monthly VIX future contracts. As a short-term trading tool, it's appropriate for sophisticated investors. VIXY can reduce U.S. equity portfolio risk, since changes in the VIX short-term future index typically display a negative correlation to S&P 500 returns.

If an investor believes that the S&P 500 is due for a decline, this fund may be expected to rise in value. A speculator who believes markets are due for a fall might also consider a short or inverse S&P 500 fund like the Direxion Daily S&P 500 Bear 1X ETF (SPDN), which is created to provide 100% inverse exposure to the returns of the S&P 500.

For moderate traders: ProShares VIX Mid-Term Futures ETF (VIXM). This VIX ETF provides investors with exposure to the S&P 500 VIX Mid-Term Futures Index. VIXM tracks the returns of a portfolio of monthly VIX future contracts with an average expiration maturity of five months.

VIXM might be appropriate for investors seeking to profit from increases in anticipated volatility in the S&P 500 during an intermediate period. Since the fund has been negatively correlated with the returns of the S&P 500, it may provide additional portfolio diversification. 041b061a72

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