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.
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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