What Is the VIX? Volatility Index and VIX ETFs

The VIX has become a widely followed index in the financial industry and is often referenced in news reports and market analysis. It serves as a benchmark for volatility-related financial products, including volatility exchange-traded funds, futures contracts and options.

With volatility sharply rising amid rising market uncertainty, nervous investors are considering volatility ETFs like the ProShares VIX Short-Term Futures ETF (VIXY). 

Find out what investors need to know about the VIX, including how it works, its history and the pros and cons of investing in volatility ETFs. 

What Is VIX? 

The VIX, also known as the Cboe Volatility Index, is a widely recognized measure of market volatility and investor sentiment. It is often referred to as the "fear gauge" or "fear index." The VIX was created by the Chicago Board Options Exchange (Cboe) in 1993 and has since become a popular tool for investors, traders and analysts. 

How Does the VIX Work? 

The VIX is derived from a range of options contracts on the S&P 500 index, both calls (options to buy) and puts (options to sell). It incorporates the prices of these options to calculate an implied volatility level. The VIX is expressed as a percentage and represents the expected annualized volatility over the next 30 days.  

The VIX is calculated based on the prices of options on the S&P 500 index. It uses a complex formula to measure the market's expectation of near-term volatility. The index reflects the anticipated magnitude of price fluctuations in the S&P 500 over the next 30 days. The higher the VIX, the greater the expected volatility in the market, indicating higher levels of fear or uncertainty among investors. 

How Do Investors Use the VIX? 

Investors and traders use the VIX as a gauge of market sentiment and as a tool for various purposes. It can help assess market risk, guide hedging strategies, indicate potential market turning points and provide insights into investor sentiment. The VIX is a measure of expected volatility and therefore not an asset that can be directly invested in. 

Is a High VIX Good or Bad? 

The interpretation of a high VIX level as being "good" or "bad" depends on the perspective and investment strategy of an individual investor.  

Here are different interpretations of a high VIX: 

• Trading opportunities: Active traders and speculators may view a high VIX as a "good" thing. Increased market volatility can provide more trading opportunities, as larger price swings can create potential short-term profit opportunities. These traders may use volatility-related instruments to capitalize on price fluctuations. 
• Hedging and protection: Some investors may see a high VIX as an opportunity for hedging and downside protection. They might use volatility products, such as volatility ETFs, or options strategies to hedge against potential market declines or to profit from volatility itself. For these investors, a high VIX can be seen as a useful tool to manage risk. 
• Contrarian indicator: In some cases, a persistently high VIX could be viewed as a contrarian indicator. When the VIX reaches extremely elevated levels, it may suggest that fear and pessimism have reached an extreme, potentially indicating a market bottom and a buying opportunity for some investors.  
• Market turbulence: A high VIX often corresponds to increased market turbulence and uncertainty. This can be viewed as "bad" by investors who prefer stable and predictable markets. It suggests that investors are expecting higher levels of volatility and potential downside risk in the near term. 

A low VIX can be interpreted in the opposite respect as a high VIX. It's also important to note that the VIX is just one measure among many that investors consider when evaluating market conditions. 

How Can You Invest in VIX? 

Investing directly in the VIX itself is not possible because the VIX is an index and not a tradable asset. However, there are several ways to gain exposure to the VIX or its volatility through derivative instruments and exchange-traded products. Here are some common methods: 

• VIX futures: The Cboe offers futures contracts on the VIX. These futures allow investors to speculate on the future direction of the VIX. Trading VIX futures requires a futures trading account and an understanding of futures contracts and associated risks. 
• VIX options: Options on the VIX provide investors with the ability to trade volatility. Options can be used for hedging or speculating on the future volatility levels of the VIX. Trading VIX options requires options trading approval from your brokerage and knowledge of options strategies. 
• Volatility ETFs and ETNs: Exchange-traded products, such as ETFs and ETNs (exchange-traded notes), aim to track the performance of the VIX or VIX futures. These products provide a convenient way to gain exposure to volatility without directly trading futures or options. Some examples include the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the ProShares VIX Short-Term Futures ETF (VIXY). 
• Volatility mutual funds: Certain mutual funds focus on investing in volatility-related instruments, including VIX futures or options. These funds are managed by professional fund managers who actively adjust the portfolio based on market conditions and volatility outlook. 

Top VIX ETF List by AUM

 ETNs and inverse VIX ETFs were excluded from this list.

Pros and Cons of a Volatility Index 

A volatility index, such as the VIX (Cboe Volatility Index), can offer certain advantages and disadvantages. Here are some pros and cons to consider: 

Pros of a Volatility Index 

• Market sentiment indicator: Volatility indexes, like the VIX, can serve as indicators of market sentiment and investor fear or uncertainty. They provide a snapshot of how market participants perceive the potential volatility and risk in the near term. These indicators can help investors gauge the overall sentiment and make informed investment decisions. 
• Risk management tool: Volatility indexes can be useful for risk management purposes. They allow investors to monitor and assess market volatility levels, potentially helping to identify periods of heightened risk. By incorporating volatility indicators into their investment strategies, investors can make more informed decisions regarding portfolio allocation, hedging or adjusting risk exposures. 
• Hedging opportunities: Volatility indexes can provide hedging opportunities. Investors can use volatility-related instruments, such as VIX ETFs, futures or options, to hedge against market declines or to protect their portfolios during periods of high volatility. These tools can potentially offset losses in other positions, acting as insurance against adverse market movements. 
• Trading and speculation: Volatility indexes offer opportunities for traders and speculators. The price movements of these indexes can be volatile, providing potential short-term trading opportunities for those who actively trade volatility-related instruments. Traders may aim to profit from fluctuations in market volatility by taking positions in VIX futures, options or volatility ETFs. 

Cons of a Volatility Index 

• Complex to interpret: Volatility indexes can be complex to interpret, especially for inexperienced investors. Understanding the methodology, calculation and implications of these indexes requires a level of financial knowledge and familiarity with options and derivatives. 
• Limited time horizon: Volatility indexes typically reflect short-term expectations of market volatility, often for the next 30 days. They may not accurately capture longer-term volatility trends or provide insights into market behavior beyond the short term. 
• Not directly investable: Volatility indexes, including the VIX, are not directly investable assets. Investors cannot buy or sell the VIX index itself. Instead, exposure to volatility is gained through derivative instruments, such as futures or options, or through volatility-related products like ETFs or ETNs. These instruments carry their own risks and complexities. 
• Volatility persistence: Volatility indexes, including the VIX, can exhibit periods of persistence, where volatility remains high or low for an extended period. This can lead to challenges in using the indexes for timing the market or making short-term trading decisions. 

Bottom Line on Volatility and VIX ETFs 

VIX ETFs, such as VIXY and UVIX, offer the potential to profit from market volatility. They can act as a short-term hedge against market downturns. However, VIX ETFs are notoriously complex and risky investments. They often suffer from significant performance decay due to the nature of volatility futures, and they can be highly volatile themselves, making them unsuitable for most investors.