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Top 3 Volatility ETFs for Active Traders

In this article, I will provide the history and top VIX ETFs. Lastly, I will discuss the top 3 VIX ETFs for active traders. An active trader is someone that day trades or swing trades throughout the year.

What is the VIX or Volatility Index?

VIX is calculated based on the implied volatility of a group of options on the S&P500, which includes options that are nearing their expiration and options that are expiring the next month.

The indicator is also referred to within the trading community as the fear index. This is because heavy selloffs produce a spike in the VIX.

CBOE VIX Volatility Index

An important point as you look at the above graph of the VIX is that there is no direct correlation with the price action of the S&P500. For example, the market could make a minor move, but options traders could be prepping for a selloff and there is a spike in put options which sends the VIX climbing.

General Rules of Thumb

While the price action does not mirror the index, here are a few rules of thumb.

  • If the VIX plummets, the market is bullish.
  • Spikes to the upside imply the market is in bearish territory.

I remember looking at the indicator in the early 2000s. A spike above 60 pretty much-called market bottoms and readings in the 20s would predict market corrections.

But since we have been on this nearly 10-year bull run, low readings in the VIX don’t mean as much.

What’s the Difference Between VIX Products and Other Securities

The one main difference is you can buy a stock and it can increase many multiples. For example, whoever had the presence of mind to buy and hold Apple is a genius.

Now, the VIX will have nice price swings, but these are within a range. What I mean by this is the VIX is not going to go from 30 to 200 and then trade within that 200 range for an extended period of time. At some point, the indicator is going to come back down to earth.

Again, this is a measure of forward option activity and options do not stay at sustained levels to the low or high side for very long.

Let’s look at a few charts to further illustrate this point.

VXX Chart

VXX Chart – iPath S&P 500 VIX ST Futures ETN (VXX)

XVZ

XVZ = iPath S&P 500 Dynamic VIX ETN

As you can see from both of these charts while there is movement, you are not going to get the up and to the right action like ETFs that mirror a market index or a growth stock.

Why Do Traders and Investors Trade VIX Products?

The funny thing about volatility is that it is not a commodity or a stock. Yet, despite this rather distinguishable factor, volatility is often a sought after security among day traders and investors.

Day Traders

For day traders, volatility gives them the opportunity to trade securities like the TVIX which have a lot of liquidity. This allows traders to get in and out of the market quickly throughout the day.

Investors

While this article covers active investors, volatility is used as a hedging tool to protect their long term investments.

What is the Best Volatility ETF?

Types of Volatility ETFs (Source - ETF.com)

Types of Volatility ETFs (Source – ETF.com)

You can go long or short. You also have the option of looking at short-term, mid-term and inverse futures.

This is a pretty exhaustive list. Like everything else in the market, it’s always a good idea to focus in on one or two instead of trying to boil the ocean trading every security.

Categories of Volatility ETFs

Let’s group these ETFs into subcategories to make things clearer.  Please note some of these tickers could be inactive as the ETF has fully matured. If so, you will need to do a bit of research to locate the latest ticker.

Standard Volatility ETFs

Below is a list of standard volatility ETFs which track short-term and mid-term futures.

Symbol ETF Name Total Assets* YTD Average Volume Previous Closing Price
VXX iPath® S&P 500 VIX Short-Term Futures ETN 1055234.5 -31.24% 38959332 17.54
VIXY ProShares VIX Short-Term Futures ETF 150716.7 -31.28% 2671011 14.61
XIVH VelocityShares VIX Short Volatility Hedged ETN 46140 30.07% 2161 45.89
VIXM ProShares VIX Mid-Term Futures ETF 39645.9 -17.12% 26271 35.09
VXZ iPath S&P 500 VIX Mid-Term Futures ETN 34022.2 -16.90% 133619 28.96

Besides the classic volatility-based ETFs there are those which are leveraged and inverse.

Leveraged Volatility ETFs

The leveraged volatility ETFs offer a magnified exposure to the VIX. These instruments can provide amplified returns but they come with larger expense ratios which can exceed 1%.

Symbol ETF Name Total Assets* YTD Average Volume Previous Closing Price
UVXY ProShares Ultra VIX Short-Term Futures ETF 435972.4 -53.99% 13457313 20.13
TVIX VelocityShares Daily 2X VIX Short-Term ETN 195975.3 -53.78% 13855800 4.4
TVIZ VelocityShares Daily 2X VIX Medium-Term ETN 1795.4 -31.69% 11894 5.13

Inverse ETFs

Inverse volatility ETFs move in the opposite direction of the VIX. Please make sure you read later in the summary section of this article how that at times can be risky.

Symbol ETF Name Total Assets* YTD Average Volume Previous Closing Price
XIV VelocityShares Daily Inverse VIX Short-Term ETN 548608.8 42.07% 13875242 66.42
SVXY ProShares Short VIX Short-Term Futures ETF 357304.5 41.56% 3137016 128.79
ZIV VelocityShares Daily Inverse VIX Medium-Term ETN 82897.3 19.53% 37127 55.63

The Top 3 Volatility ETFs for Traders

This is a pretty big statement, so let me qualify this before we go any further.

I am going to list out the five volatility ETFs that are the most active on a daily basis. Essentially these are the ones which come up on my scan on a daily basis. These are great for getting in and out of trades with ease.

  1. ProShares VIX Short-Term Futures ETF (VIXY) is no doubt one of the top VIX ETFs to trade. The ETF has an average daily volume of 1.9 Million and over 200 Million in total assets.

    VIXY

    VIXY

  2. VelocityShares Daily 2x VIX Short-Term ETN (TVIX) is a leveraged ETF. This means for every point move in the VIX, the ETF moves double in value. I personally stay away from leveraged ETFs because of the increased volatility. ETF has an expense ratio of 0.85%. The VIXY does not represent a spot investment in the VIX, but rather is linked to an index comprised of VIX futures.
TVIX

TVIX

  1. The ProShares Ultra VIX Short-Term Futures ETF (UVXY) this is essentially the same as the TIVX, it’s just offered by a different company. Both the UVXY and TVIX have the same expense ratio of 1.65% but the UVXY has an average daily volume of 17M, which is almost double that of the TVIX.
UVXY

UVXY

In Summary

VIX related ETFs are not meant to be a long-term investment. These instruments are for traders and not for a 401k plan.

If you disagree with me, please check out this article which covers the fallout of the XIV ETF by Credit Suisse Bank. This was an inverse ETF to the VIX and when the market sold off, the VIX spiked. This led to the XIV dropping a whopping 90% in a matter of days.

Again, great for short-term traders, but not something for value investors to park their money.

How Can We Help

If you are contemplating trading these securities, you can test out your strategies within Tradingsim. We have all of the VIX ETFs for you to see which one is best aligned to your trading style.

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