The Volatility ETF is based on the VIX Volatility Index which is developed by the Chicago board Options Exchange (CBOE). It has been tracking since 1986 by measuring the volatility of S&P 100 options but then changed to S&P 500 in 2003. It is known as the VXO now. The past few years in the stock market have covered no less than twelve volatility ETF products. These instruments are introduced to give the investors an additional way to hedge stock market risks.
A low value of VIX indicates an expected stability in the stock market and a high value indicates an expected turmoil. It exhibits a strong negative correlation with the equity markets. It is also known as the ‘fear index’ to some traders. This can make VIX based ETF products unattractive for long term investors.
There are approximately 15 ETFs in the volatility ETFs available out there with an expense ratio ranging from 0.85% to 1.65%. The average expense ratio is about 1.06%. The main contributors of ETFs in this category are the Barclays iPath, Citigroup, ProShares, UBS and VelocityShare.
iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX)
The iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) has attracted a fair amount of interest from investor who are looking to diversify their portfolios. It is linked to the S&P 500 VIX Short Term Futures Index Total Return. This volatility ETF is a good option for investors looking to protect a big slide in prices. But the VXX have not been performing really well in the ETF market despite being popular. The slide in VXX has been driven by the underlying VIX index and steep contagion in VIX futures markets. The total assets amounted to approximately $1.2 billion respectively last year.
S&P 500 VIX Short-term Futures ETF (VIXX)
The Connecticut based Jefferies S&P 500 VIX Short-term Futures ETF (VIXX) was a product launched to replicate the performance of futures on CBOE Volatility Index. It is the first volatility ETF to offer exposure to equity market volatility. It is similar to VXX in many ways only it is structured as an ETF and the VXX is an ETN but they both are compared in the ETF market for volatility and investment options. Moreover, the direct investment in the VIX index is not possible and firms roll out volatility based products in ETN form and because they are faster to launch.
ProShares VIX Short-Term Futures (NYSE:VIXY)
This year ProShares launched the ProShares VIX Short-Term Futures (NYSE:VIXY) and VIX Mid-Term Futures (NYSE:VIXM) which are linked to the volatility of S&P 500 VIX Short-Term Futures Index and S&P 500 VIX Mid-Term Futures Index. They have an annual expense ratio of 0.85% and have total assets of more than $2 billion. VelocityShares is also one of the first providers of daily inverse and daily two times leveraged ETNs for the S&P 500 VIX Futures Index.