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Best VIX ETFs for Q4 2022

by SuperiorInvest

Volatility rose to the highest levels since 2008 in March 2020 due to the coronavirus pandemic and its dramatic impact on the global and US economies. It then eased through most of 2021, but has fluctuated dramatically in recent months due to Russia’s invasion of Ukraine and fears of a recession. Many investors tried to profit from the wild swings of the market volatility exchange traded funds (ETFs)many of them are related to Cboe Volatility Index (VIX).

The VIX is a real-time index that represents market expectations of the 30-day outlook volatilityas derived from S&P 500 prices index options. It provides peace market risk and investor sentiment (also known as market sentiment) and is popularly known as the “fear index”.

Key things

  • The Cboe Volatility Index (VIX) rose in March 2020 and remains at elevated levels globally Supply Chain disruption and Russian invasion of Ukraine.
  • VIX exchange traded funds (ETFs) with the best annual total returns are VXZ, VIXM and SVOL.
  • All three ETFs primarily hold futures contracts to track market volatility.

VIX cannot be invested directly, but sophisticated investors can use VIX ETFs to track market volatility by holding VIX. futures contracts. The price of these funds will rise and fall in tandem with volatility, but at different rates depending on how they are constructed. These ETFs are typically held for relatively short periods to take advantage of rapid changes in volatility, as opposed to being part of a long-term period, buy and hold investing strategy. These are very complex types of financial instruments and are not intended for novice investors.

There are five VIX ETFs that trade in the U.S. except inverse and leverage effect funds, even those with less than $50 million assets under management (AUM). The VIX is up 35.8% over the past year. The S&P 500 total return for the same year period is -10.6% as of September 7, 2022. While sophisticated investors tend to trade VIX ETFs on a very short-term basis, the best-performing VIX ETF on an annual basis is the iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ).

We examine three of the best VIX ETFs below. All numbers for each ETF below are as of September 7, 2022. In order to focus on the Funds’ investment strategy, the best holdings listed for each ETF exclude cash holdings and holdings purchased with the proceeds of securities lending, except in unusual cases such as an exceptionally large portion of cash.

  • Performance in one year: 7.3%
  • Expense ratio: 0.89%
  • Annual Dividend Yield: N/A
  • Three-month average daily volume: 21,581
  • Assets under management: $56.7 million
  • Start date: January 17, 2018
  • Issuer: Barclays Capital

VXZ is structured as an exchange traded note (ETN), an unsecured debt security that pays no interest and has equity-like characteristics. Tracks the total return of the S&P 500 VIX Intermediate Futures Index, which provides exposure to the daily rolling long position in the fourth, fifth, sixth and seventh months of VIX futures contracts and reflects market participants’ views on the future direction of the VIX. As the fund consists of longer term futures contracts, it is likely to show a lower value correlation with spot VIX. But it is still intended only for sophisticated investors with a short-term focus. As an ETN, VXZ is avoided tracking error but it can expose investors credit risk.

  • Performance in one year: 6.6%
  • Expense ratio: 0.85%
  • Annual Dividend Yield: N/A
  • Three-month average daily volume: 113,100
  • Assets under management: $102.7 million
  • Start date: January 3, 2011
  • Issuer: ProShares

The VIXM is structured as a commodity fund, a type of private investment that combines investor contributions to trade commodity futures and options. The fund tracks the S&P 500 VIX Mid-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of five months to expiration. VIXM holds Cboe VIX futures contracts to provide investors with returns based on increases in the expected volatility of the S&P 500 index. This ETF holds relatively longer futures contracts. The fund does not track the VIX and should be expected to perform very differently from the fear indicator. It is intended for sophisticated investors with a short-term investment horizon who are able to monitor their investments on a daily basis.

  • Performance in one year: -4.4%
  • Expense ratio: 0.54%
  • Annual dividend yield: 2.17%
  • Three-month average daily volume: 70,825
  • Assets under management: $108.7 million
  • Start date: May 12, 2021
  • Issuer: Simplify Asset Management Inc.

SVOL is an actively managed fund that aims to deliver results of approximately one-fifth to three-tenths (-0.2x to -0.3x) the inverse of the S&P 500 VIX Short-Term Futures Index. So if the index returns -10%, SVOL would aim to provide returns between 2% and 3%, less the fund’s expenses. The fund uses a combination of a short VIX position and options to protect against extreme volatility.

The comments, opinions and analysis expressed herein are for informational purposes only and should not be construed as individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information contained herein to be reliable, we do not guarantee its accuracy or completeness. The opinions and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analysis contained in our content are provided as of the date of publication and are subject to change without notice. The material is not intended to be a complete analysis of all material facts relating to any country, region, market, industry, investment or strategy.

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