Why a Low VIX Index Is Good for VIXY

Why a Low VIX Index Is Good for VIXY

Volatility can help nimble traders, but may be a disaster for passive investors.

Reviewed by: Ron Day
Edited by: Sean Allocca

The S&P 500 index is the most diversified stock market index, but there’s still room for volatility.

The VIX tool measures the implied volatility of S&P 500 stocks, which reflects the past price variance; while implied volatility measures the market’s sentiment of future price variance. The VIX is a compilation of the implied volatilities of the S&P 500 stocks, as measured from put and call options prices.

Implied volatility tends to move lower in stable or rising markets, while price corrections or downdrafts push it and the VIX index higher. The ProShares VIX Short-Term Futures ETF (VIXY) tracks an index with exposure to futures on the CBOE Volatility Index with an average one-month maturity and is reset daily. VIXY is a short-term trading tool.

Given the many issues facing the stock market, the VIX at the 21 level in late October could be a bargain. 

VIXY Spikes During Uncertainty 

The VIX can spike during periods of uncertainty, as demonstrated with highs of over 80 in 2008 and 2020.


Source: Barchart 

As the chart highlights, the 2008 global financial crisis sent the VIX to an all-time 89.53 high, and the 2020 worldwide pandemic caused it to rise to 85.47. During these periods, the S&P 500 index plunged, causing the implied volatility on put and call options to soar.

Markets across all asset classes, including stocks, reflect economic trends and geopolitical events. While trends or changes in these landscapes can occur slowly, sudden, surprising events tend to cause the most significant price variance. The 2008 financial crisis and the 2020 pandemic shocked investors and traders, leading to the VIX spikes to over 80.

In late October 2023, the landscape is highly uncertain, with the potential for events that could shock market participants.

A Compelling Case for a Much Higher VIX 

The case for higher volatility includes: 

  • U.S. interest rates have risen to the highest level since 2007. A thirty-year conventional fixed-rate mortgage under 3% in late 2021 is now at the 8% level. Consumer loans and financing rates are causing significant economic pressure. Elevated inflation above the Fed’s 2% target could cause the central bank to continue increasing interest rates. Rising rates tend to weigh on stock prices.
  • The war in Ukraine continues to rage, threatening world peace as an escalation that crosses NATO borders could ignite a worldwide conflict.
  • China’s plans for Taiwanese reunification threaten peace in Asia. North Korea has become a nuclear power.
  • The terrorist attack in Israel and the war against Hamas threatens to escalate, with the U.S. supporting Israel and Iran supporting Hamas and other terrorist groups that could cause a significant escalation.
  • Political division in the United States has increased as the 2024 Presidential election approaches. 

These economic and political issues can cause significant stock market volatility. At the 21 level, the VIX remains one-quarter the level at the 2008 and 2020 highs, which could be too low in the current environment.

Funds Flow into VIXY in 2023 

At $27.04 per share on October 27, VIXY had $207.5 million in assets under management. VIXY trades an average of over 5.56 million shares daily and charges a 1.05% management fee.

VIXY is a highly liquid short-term trading instrument with positive fund flows in 2023.

Chart 2 

Source: etf.com 

The etf.com Fund Flows Tool shows that $117 million has flowed into VIXY since the end of 2022. The war in Israel began after the Oct. 7 terrorist attack. While $27 million has flowed out of VIXY since Oct. 4, the selling was likely profit-taking after the VIX moved higher.

A Strategy for Using VIXY  

The issues facing the stock market create a compelling case for a much higher VIX and VIXY, but VIXY is a short-term trading tool. VIXY suffers from time decay as it uses leverage to create returns. Therefore, the value erosion causes reverse stock splits: 

Chart 3

Source: stockscan 

VIXY experienced five reverse splits since 2013, with the latest 1:5 reverse split in June 2023.

The optimal strategy for approaching VIXY to profit from higher volatility includes price and time stops on long positions. VIXY is not appropriate for a buy-and-hold plan. When stopped out because of timing or price, reentering with another set of risk dynamics is a course that will limit losses in the quest for oversized returns.

VIXY is a trading tool that could enhance returns, but careful attention to risk-reward dynamics and discipline are necessary for success.

Andrew Hecht is a Nevada-based writer and analyst covering stocks, bonds, foreign exchange, cryptocurrency and raw material markets. He has over four decades of experience in markets across all asset classes, concentrating on commodity markets. Hecht was a senior trader at Salomon Brothers in the 1980s and 1990s, running sales and trading businesses. In 2013, McGraw Hill published his book, “How to Make Money in Commodities."