A volatility exchange-traded fund (ETF) lets merchants guess on a rise within the inventory market’s volatility. It may be a extremely worthwhile wager if the market instantly turns into extra unstable, for instance, if it crashes, however the fund’s worth continuously erodes as a consequence of how the fund is structured.
Volatility is commonly measured by the CBOE Volatility Index, generally often known as the VIX. It’s known as “the worry gauge” because the index spikes when traders get nervous. The index traditionally strikes inversely to the route of the Commonplace & Poor’s 500 Index. So a volatility ETF could also be helpful as a short-term hedge in opposition to a portfolio or as a one-way guess available on the market’s route.
Listed here are a number of the finest volatility ETFs and ETNs, with information as of April 22, 2025.
Finest volatility funds
iPath Sequence B S&P 500 VIX Brief-Time period Futures ETN (VXX)
This ETN offers publicity to S&P 500 VIX Brief-Time period Futures Index Whole Return. As a result of it’s an ETN, holders haven’t any principal safety and personal unsecured debt of the corporate sponsoring the notes, Barclays Financial institution.
- YTD return: 67.1 p.c
- 5-year returns (annualized): -51.9 p.c
- Expense ratio: 0.89 p.c
ProShares VIX Brief-Time period Futures ETF (VIXY)
This fund tracks the S&P 500 VIX Brief-Time period Futures Index, which follows a portfolio of futures contracts with a weighted common of 1 month till expiration.
- YTD return: 64.6 p.c
- 5-year returns (annualized): -52.4 p.c
- Expense ratio: 0.95 p.c
iPath Sequence B S&P 500 VIX Mid-Time period Futures ETN (VXZ)
This ETN tracks the S&P 500 VIX Mid-Time period Futures Index Whole Return. As a result of it’s structured as an ETN, holders haven’t any principal safety and personal unsecured debt of the issuer, Barclays Financial institution.
- YTD return: 33.8 p.c
- 5-year returns (annualized): -13.8 p.c
- Expense ratio: 0.89 p.c
ProShares VIX Mid-Time period Futures ETF (VIXM)
This ETF tracks the S&P 500 VIX Mid-Time period Futures Index, which follows a group of futures contracts with a weighted common expiration of 5 months.
- YTD return: 34.4 p.c
- 5-year returns (annualized): -14.5 p.c
- Expense ratio: 0.85 p.c
ProShares Brief VIX Brief-Time period Futures ETF (SVXY)
This ETF tries to supply each day outcomes which can be one-half the inverse of the each day efficiency of the S&P 500 VIX Brief-Time period Futures Index. In different phrases, if this index rose 1 p.c in a day, the fund would intention to fall 0.5 p.c. If the index fell 1 p.c, this fund goals to rise 0.5 p.c.
- YTD return: –30.9 p.c
- 5-year returns (annualized): 18.1 p.c
- Expense ratio: 0.95 p.c
What’s a volatility ETF?
A volatility ETF offers merchants the flexibility to wager on the inventory market’s volatility. Not like a typical ETF, which owns inventory or choices of precise firms, a volatility ETF makes use of complicated monetary devices known as derivatives (comparable to futures) to create a fund that rises in worth when the market will get rocky. If the market does turn out to be extra unstable, the fund might soar, typically shortly.
Like many other forms of leveraged ETFs, volatility ETFs are supposed to be owned over a really quick interval, typically for only a day or two. As a result of they use derivatives, whose worth tends to say no over time, volatility ETFs are sometimes swimming in opposition to a fast-moving present. Due to this construction, volatility ETFs typically do very poorly over time, as worth leaks out of the fund.
Volatility funds might also technically be exchange-traded notes (ETNs), which is a considerably totally different construction from ETFs, however should still observe the volatility of the market.
The professionals and cons of volatility ETFs
Benefits of volatility ETFs
- Simple-to-access publicity to volatility: When the market will get rocky, merchants might flee to volatility ETFs to reap the benefits of the growing uncertainty in markets. So this type of fund affords a simple strategy to shortly get entry to that publicity.
- Hedge on a portfolio: A volatility ETF might supply the flexibility to hedge a portfolio over a brief time period, providing an asset that rises as most others fall.
- Worth might spike shortly: When the market instantly turns unstable, the worth of some volatility ETFs might rise a whole lot of p.c in just some days. So in the event that they place a well-timed commerce, merchants can earn many instances their wager shortly.
Disadvantages of volatility ETFs
- Meant to be held for very quick durations: Volatility funds are actually meant to be held just for quick durations, giving publicity to the short-term motion of volatility.
- Worth tends to decay over time: Due to using derivatives within the construction, the worth of volatility funds tends to decay over time naturally.
- Unattractive long-term returns: Shopping for and holding a volatility fund is unattractive, as worth seeps out of the funds over time by means of futures contracts.
What to search for in an ETF
When investing in ETFs, it’s helpful to take a look at a couple of elements of every ETF so that you just really purchase what you supposed to purchase. Listed here are three key issues to search for:
- The focused publicity: Volatility ETFs present totally different exposures to the market, when it comes to timeframe (quick and medium time period), whether or not they carry out inversely to what they’re monitoring and whether or not they take a leveraged strategy to amplify positive aspects.
- The funding observe report: You’ll additionally need to know the observe report of the ETF. The observe report can provide you some concept of what to anticipate from the ETF. However volatility ETFs are designed to carry out properly solely over quick durations, so in lots of instances long-term returns look terrible.
- The expense ratio: Take note of the expense ratio, which tells you the way a lot it prices to personal the fund yearly as a p.c of your complete funding in it.
The way to spend money on volatility ETFs
A volatility ETF could make it simpler to revenue if the inventory market makes a sudden transfer decrease or it might even make it easier to shortly hedge a place over a brief time period. However some funds have extra upside if volatility rears up, whereas quick volatility funds carry out properly if the market stays calm, profiting from the time decay to revenue. So it’s very important to know what publicity you need.
The ETFs listed above give merchants a strategy to acquire publicity to volatility, however how they make investments is as much as them. Merchants can shoot for the moon with short-term volatility funds or take a extra modest strategy with medium-term funds and even reap the benefits of calm markets with quick funds.
Merchants will even need to perceive why they’re utilizing volatility funds and after they’re useful. Volatility ETFs could also be useful over quick durations, however their construction implies that the standard fund declines in worth over time. So they could be positive as a short-term hedge when the market instantly encounters hazard, however merchants on the lookout for a longer-term hedge will look elsewhere.
You should purchase volatility ETFs at any of the perfect brokers for inventory buying and selling.
Backside line
Merchants seeking to make a short-term guess on the route of the market might determine to make use of a volatility ETF to precise that view. However volatility funds have vital drawbacks and their worth tends to decay over time, even when it spikes typically because the market’s volatility heats up.
— Bankrate’s Brian Baker contributed to an replace of this story.
Editorial Disclaimer: All traders are suggested to conduct their very own unbiased analysis into funding methods earlier than investing resolution. As well as, traders are suggested that previous funding product efficiency isn’t any assure of future worth appreciation.
