S&P 500 Volatility Offers Opportunities for ETF Investors

Some funds try to capitalize when the VIX fluctuates.

Taylor Swift’s "Eras Tour" hit movie theaters this month. The show is filled with music and movement.

In a similar way, ETF investors have seen the S&P 500 have more of its own “costume changes” than usual lately in the form a VIX index that in the past five weeks has traded between 13.34 and 19.78. 

In layman’s terms for the VIX equates to fluctuating between “all is calm” and “something’s about to happen.” That brings all kinds of opportunities to the table for ETF investors. 

Volatility Increasing 

For some, higher volatility is financial love story. For those who don’t know how to handle it, it can be as difficult as being one of Taylor’s ex-boyfriends, with a song to match. Because after spending the summer in a tight trading range of 13-15, that trend is quickly changing thanks to potential market risks from many sources, geopolitical and economic.  

Furthermore, the ramp up in options volume, and its appeal makes VIX and related volatility-based exchange-traded funds a key topic for professional investment advisors to understand. Indeed, options activity more than doubled from 2019 to 2022, and this year is likely to set another record, topping last year’s.  

The increased appeal of options is rooted in many factors relating to how they can be a surrogate for exposure to an asset type with less capital at risk, a source for adding additional income to portfolios and a way to construct often complex ways to achieve specific results, while taking reducing some of the market’s inherent risks. 

ETFs That Use VIX 

Among the ETFs that can use a frenetic VIX to diversify portfolios, the Invesco S&P 500 Downside Hedged ETF (PHDG) owns the S&P 500, but allocated 1/10 of its assets to VIX futures. This means that when VIX spikes, the risk of 90% of the portfolio in stocks can be increasingly offset by the surging value of the other 10%. And the Aptus Drawdown Managed Equity ETF (ADME) combines stocks, VIX call options and purchase and sale of equity options to control risk in the $158 million fund. 

For more of a pure play on the movement of the VIX, the ProShares VIX Short-Term Futures ETF (VIXY) and its opposite cousin the ProShares Short VIX Short-Term Futures ETF (SVXY) buy or short VIX futures as a main course of business. These are not for the faint of heart. VIXY, which profits from a rising VIX, gained more than 21% on Friday, but lost nearly 10% on Monday.  

Those are just a few examples of the range of options (pun intended) that investment advisors might find intriguing as part of distinguishing their practice from the masses.

Because recent indications are that the summer slumber is over for those expecting a silent VIX. As Taylor Swift might say, are you ready for it?