inverse and leveraged exposure to an index comprised of short-term VIX futures contracts. The new ETFs include:
- Ultra VIX Short-Term Futures ETF (NYSE:UVXY): This ETF will offer 200% daily leveraged exposure to the S&P 500 VIX Short-Term Futures Index, a benchmark that consists of first and second month VIX futures contracts.
- Short VIX Short-Term Futures ETF (NYSE:SVXY): This ETF offers daily inverse exposure to the same index, seeking to deliver daily returns that correspond to -100% of the S&P 500 VIX Short-Term Futures Index.
The launch of UVXY and SVXY brings the total number of exchange-traded products in the Volatility ETFdb Category to 30. The vast majority of those are exchange-traded notes, a structure that avoids tracking error but exposes investors to the credit risk of the issuing institution. ProShares now offers four VIX-related ETFs; the two new funds join VIXY and VIXM, which offer exposure to indexes consisting of short-term and mid-term futures, respectively.
Interest In Volatility
Though the VIX has been a widely followed indicator of anticipated equity market volatility for more than two decades, the ability to access this benchmark as an investable asset is a relatively new innovation. Recent years have seen the development of exchange-traded VIX futures contracts, and in early 2009 iPath rolled out two ETNs linked to VIX-based benchmarks. Since then, interest has surged; the 30 volatility ETPs now available to U.S. investors have aggregate assets of about $2.5 billion.
The appeal of volatility-based assets lies in the strong negative correlation with equities; the VIX tends to spike when stock markets encounter turmoil, and shrink back when stocks surge. That makes products such as UVXY potentially intriguing ways to bet on a slide in stocks or to hedge against existing exposure. SVXY, on the other hand, is designed to track the inverse of the performance of a VIX-based index; that ETF can be expected to perform well when the VIX slumps.
Watching The Curve
Like all volatility ETPs, SVXY and UVXY won’t offer exposure to the spot VIX; because they implement a futures-based strategy to achieve their objectives, the returns generated by these products will be impacted by the slope of the futures curve. And in the case of volatility, the degree of contango or backwardation in futures markets can be a major factor in bottom line returns. Historically, VIX futures markets have been in a state of consistently steep contango–particularly at the short end of the maturity spectrum. That allowed products such as SVXY to exploit what could be called structural inefficiencies (or perhaps simply the structural nuances) of this asset class.
But more recently, a surge in expected volatility and investor anxiety has flipped the tables; VIX futures are now heavily backwardated. Recently, December contracts were trading at a discount of close to 20% to the spot VIX. That means that products such as SVXY are flying into the wind, while products offering traditional long exposure VIX indexes might get a boost [see Fresh Look At VIX ETPs].
Head To Head
While the new ProShares products are the first ETFs to target the specific market, they aren’t the first to deliver access to these strategies. VelocityShares already offer a 2x daily reset VIX TEN, the Daily 2x VIX Short-Term ETN (NYSE:TVIX) as well as a Daily Inverse VIX Short-Term ETN (NYSE:XIV). Those products, which have aggregate assets of about $400 million, have seen wildly different returns so far in 2011; TVIX is up more than 50% on the year while XIV has lost more than half of its value year-to-date.
In total, there are now 11 ETPs offering inverse exposure to volatility indexes.
Both new ETFs will charge an expense ratio of 0.95%, about 12 basis points less than the average for the Volatility ETFdb Category.
Written By Michael Johnston From ETF Database Disclosure: No positions at time of writing.
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