Long VIX ETNs:
iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX): The iPath S&P 500 VIX Short Term Futures ETN is designed to track the S&P 500 VIX Short Term Futures Index and offers market volatility exposure through CBOE Volatility futures contracts. The index buys the first and second months of the VIX futures contract.
ProShares VIX Short Term Futures ETF (NYSEARCA:VIXY): NYSEARCA:VIXY is designed to track the performance of the S&P 500 VIX Short Term Futures Index and invests in VIX futures contracts on the Chicago Board Options Exchange.
iPath S&P 500 VIX Mid Term Futures ETN (NYSEARCA:VXZ): NYSEARCA:VXZ is designed to track the S&P 500 Mid Term Futures Index through futures contracts. This ETN invests in the fourth, fifth, sixth and seventh month of the VIX futures contracts.
Inverse VIX ETNs:
XIV: VelocityShares Daily Inverse VIX Short Term ETN (NASDAQ:XIV): NASDAQ:XIV is designed to track the inverse of the daily performance of the S&P 500 VIX Short Term Futures Index.
ProShares Short VIX Short Term Futures ETF: (NYSEARCA:SVXY): NYSEARCA:SVXY is designed to deliver the inverse daily performance of the S&P 500 Short Term Index and uses the first two months of the VIX futures contracts.
VelocityShares Daily Inverse VIX (NASDAQ:ZIV): NASDAQ:ZIV is designed to track the inverse daily performance of the S&P 500 Mid-term Futures Index.
Leveraged VIX ETNs:
ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY): NYSEARCA:UVXY tracks 2X the daily performance of the S&P 500 Short Term Futures Index which includes the first and second month VIX futures contracts.
TVIX: VelocityShares Daily 2x VIX Short Term ETN (NASDAQTVIX): NASDAQ:TVIX is designed to generate 2X leveraged performance of the S&P 500 VIX Short Term Futures Index.
Spotlight on XIV and VXX:
Two of the most widely traded and popular VIX ETNs are NASDAQ:XIV (VelocityShares Daily Inverse VIX Short Term ETN) and NYSEARCA:VXX (iPath S&P 500 VIX Short Term Futures ETN) and VIX Trader focuses on trading these two investment products.
Both have inherent advantages and disadvantages but together offer a methodology to go long or short volatility.
NASDAQ:XIV positions are taken when volatility is in decline and NYSEARCA:VXX positions are taken when volatility spikes higher.
Options are available on NYSEARCA:VXX but not on NASDAQ:XIV. One can take call or put positions on NYSEARCA:VXX and also a wide combination of spreads. ProShares has an ETF, NYSEARCA:SVXY (ProShares Short VIX Short Term Futures ETF) which acts like XIV and has options available for trading.
These VIX ETNs can generally be traded in IRAs and 401ks and so offer the ability to “short” the market which is typically not available in these kinds of qualified accounts.
NASDAQ:XIV, as its name states, is designed to track the inverse movement of the S&P 500 futures contract so as VIX declines, NASDAQ:XIV should gain in value.
NYSEARCA:VXX is designed to track the moves of the VIX and so as VIX gains in value, NYSEARCA:VXX should as gain. However, both of these ETNs display significant tracking errors, particularly NYSEARCA:VXX, and so will not exactly mirror the moves of the VIX index.
NASDAQ: IV has posted dramatic results but with dramatic volatility and so offers a product well suited for trading rather than a buy and hold approach. Inverse volatility takes advantage of contango which is in effect as much as 75-80% of the time and so can give a knowledgeable investor or trader a trading edge over time as long as losses can be limited when VIX spikes higher.
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Over the longer term, inverse volatility trading gives the trader the advantage instead of the “house” which is so often the case in many investments. The two reasons for this are contango and reversion to mean which are both driving forces in volatility investments.
Contango makes future months prices more expensive and so NASDAQ:XIV is continually short selling higher priced contracts which tend to automatically decline over time and so bolster the price of the ETN on a regular monthly basis.
Conversely, contango works against NYSEARCA:VXX which makes it a very difficult investment to profitably trade:
chart courtesy of stockcharts.com
Reversion to mean also works in favor of inverse volatility investing as the VIX index tends to revert to a mean range of 15-20 after short bursts of higher volatility.
Nevertheless, there is never a free lunch and both XIV and VXX are volatile products that will suffer swift and significant losses when volatility moves rapidly up or down and against their respective positions.
Therefore, a solid trading program combined with risk management is necessary for success as huge losses can be sustained over very short periods of time.