ETF Spotlight: VIXY Rises and Falls With Volatility

When fear struck the stock market last week, so did the ProShares VIX Short-Term Futures ETF (VIXY), as the fund that tracks “the fear index” jumped nearly 50% in one day. Now that investor nerves have calmed, VIXY has fallen dramatically.

Volatility ETFs like VIXY offer hedging, trading, and diversification benefits, but investors need to understand the unique risks inherent in VIX-based strategies. 

What Is the VIXY ETF? 

VIXY, or ProShares VIX Short-Term Futures ETF, is an exchange-traded fund that tracks the S&P 500 VIX Short-Term Futures Index. The fund provides a way for investors to bet on increased market volatility.  

How VIXY Works

• Exposure to VIX futures: VIXY does not directly invest in the VIX itself but in VIX futures contracts. Specifically, it holds a rolling position in short-term VIX futures contracts, typically with one-month and two-month maturities. These futures contracts are designed to track the expected volatility of the S&P 500 index over the next 30 days. 
• Hedge against market volatility: VIXY is often used by investors as a hedge against market volatility. When the stock market becomes more volatile, the VIX typically rises, and so do VIX futures. As a result, VIXY tends to increase in value when the market experiences significant declines or increased uncertainty. 
• Short-term investment tool: Due to the nature of VIX futures, VIXY is considered a short-term investment tool. VIX futures can experience "contango," a situation where longer-dated futures contracts are priced higher than near-term contracts, leading to a potential decay in value if held over the long term. 
• Not a direct market bet: VIXY is not a straightforward bet on market direction but rather on the expectation of future volatility. This makes it more complex than traditional equity ETFs and requires a good understanding of how VIX futures work. 

Interpreting the VIX

A rise in the VIX indicates increased market fear, while a fall in the VIX generally indicates positive market sentiment as investors feel more confident in overall economic and market conditions. Here’s a breakdown of what VIX movements mean:  

When the VIX Rises

• Increased market fear: A sudden spike in the VIX typically indicates that investors are becoming increasingly worried about potential market downturns. This often happens during periods of economic uncertainty, geopolitical tensions, or unexpected negative news.  
• Potential for market decline: While not guaranteed, a rising VIX can signal increased probability of a market correction or even a crash. 

When the VIX Falls

• Decreased market fear: A decline in the VIX suggests that investors are becoming more confident about the market's outlook. This often occurs during periods of economic growth, positive news, or when market volatility is relatively low.  
• Potential for market rally: A falling VIX can sometimes precede a market rally, as investor sentiment improves and risk appetite increases. 

Bottom Line on the VIX and VIXY

It's important to note that the VIX is a leading indicator, not a predictive tool. While it can provide valuable insights into market sentiment, it doesn't guarantee future market movements. 

VIXY and other volatility ETFs often move inversely to the stock market, meaning they tend to rise when stocks fall. Due to the contango effect and the inherent decay in VIX futures, VIXY is not typically suitable for long-term investors. 

Investors should use VIXY cautiously and ensure they understand its mechanics, particularly the risks associated with VIX futures, before incorporating it into their investment strategy.