Amid concerns about a recession and dramatic fluctuations in tech stocks, investors are increasingly turning to the market to bet on further volatility.
According to Bloomberg data, during Monday's stock market plunge, the ProShares Short VIX Short-Term Futures ETF (SVXY) attracted $233 million in inflows, the largest since 2018. Despite SVXY's stock price dropping over 21% during the sell-off, it rebounded 10% on Tuesday afternoon. In contrast, the 1x Short VIX Futures ETF (SVIX) fell 39% during the downturn, marking its largest drop since its inception in 2022, but rose 15% on Tuesday.
On the other hand, the performance was even stronger for some funds. The 2x Long VIX Futures ETF (UVIX) surged 84% on Monday, achieving its largest increase since launching in 2022, with trading volume also reaching a new high. The ProShares Ultra VIX Short-Term Futures ETF (UVXY) rose 58%, setting the second-highest trading volume in its history.
Data Source: VettaFI
The growing interest in these funds reflects increasing investor concern about the stock market's future—whether it will continue to decline or experience a brief bull market drop.
This uncertainty has impacted global markets, with the S&P 500 index falling 3% on Monday, marking its largest single-day drop in nearly two years, while the Japanese Nikkei index recorded its largest single-day drop since 1987. However, both indices saw some recovery on Tuesday.
Understanding VIX and How to Invest
What is VIX?
The VIX, or Chicago Board Options Exchange Volatility Index, measures market volatility and investor sentiment. Often referred to as the “fear gauge” or “fear index,” the VIX was created by the Cboe in 1993 and has since become a popular tool for investors, traders, and analysts.
How Does VIX Work?
The VIX is derived from a range of options contracts on the S&P 500 index, including call options (buy options) and put options (sell options). It combines the prices of these options to calculate implied volatility levels. The VIX is expressed as a percentage, representing the expected annualized volatility over the next 30 days.
The VIX uses complex formulas to gauge market expectations for short-term fluctuations. It reflects the anticipated magnitude of price movements in the S&P 500 index over the next 30 days. A higher VIX indicates greater market volatility expectations, signaling higher investor fear or uncertainty.
How to Invest in VIX?
Direct investment in the VIX itself is not possible, as it is an index rather than a tradable asset. However, there are several ways to gain exposure to the VIX or its volatility through derivatives and exchange-traded products:
VIX Futures: The Cboe offers VIX futures contracts, allowing investors to speculate on future movements of the VIX. Trading VIX futures requires a futures trading account and an understanding of the associated risks.
VIX Options: VIX options provide a way to trade volatility. Options can be used for hedging or speculating on future VIX levels. Trading VIX options requires options trading approval from a brokerage and an understanding of options strategies.
Volatility ETFs and ETNs: Exchange-traded products, such as ETFs and ETNs (exchange-traded notes), are designed to track the performance of the VIX or VIX futures. These products offer a convenient way to gain exposure to volatility without directly trading futures or options. Examples include iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and ProShares VIX Short-Term Futures ETF (VIXY).
Volatility Mutual Funds: Some mutual funds focus on investing in volatility-related instruments, including VIX futures or options. These funds are managed by professional fund managers who actively adjust their portfolios based on market conditions and volatility outlook.
VIX ETFs have the potential to profit from market volatility and can serve as a short-term hedge against market downturns. However, VIX ETFs are notoriously complex and high-risk investments. Due to the nature of volatility futures, their performance can significantly decline, and they are highly volatile themselves, making them unsuitable for most investors.
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