What is the VIXY ETF?

What Is VIXY ETF? Stock market volatility is making headlines this year as the COVID-19 pandemic sends economies into freefall, and governments pass massive relief packages to shore them up. In March alone, records have been set on both sides of the equation. Some days brought terrifying crashes, while others generated massive gains, making it the most volatile month on record for the S&P 500.

While some investors have decided to sit out these epic highs and lows, others are focused on harnessing the power of this current volatility to build their wealth. The first step in this strategy is to take a close look at the Chicago Board Options Exchange’s Volatility Index (VIX).

What is the VIX? 

Also known as the “fear index” or the “fear gauge”, VIX essentially measures how investors are feeling about the future of the market over the next 30 days.

The resulting figure offers insight into how volatile the market could be, giving investors an opportunity to respond accordingly.

When the index goes up, market volatility is expected to increase. A low figure that remains stable over time indicates a relative absence of volatility in coming weeks.

On Monday, March 16, 2020, the already-high VIX increased by an astonishing 25 points, closing out the day at 82.69.

This marked a record high, exceeding the previous peak of 80.74 when markets crashed on November 21, 2008. Clearly, market conditions had investors spooked, and by all indications, the nation was entering a particularly volatile period.

Understanding that market downturns increase investor uncertainty, it stands to reason that when the stock market crashes, the VIX goes up. That information, when applied strategically, can lead to impressive profits for smart investors.

What is VIXY?

As with any index, it isn’t possible to buy into the VIX directly. However, a number of exchange-traded funds (ETFs) are structured to mirror the index’s movement. ProShares VIX Short-Term Futures ETF, or VIXY, is one such ETF.

The fund keeps pace with the VIX through the S&P 500 VIX Short-Term Futures Index. This index examines the returns of a collection of futures contracts that have a weighted average of expiration to one month.

VIXY isn’t for everyone, and in fact, ProShares recommends it as an option for knowledgeable investors only. Investors who choose VIXY tend to fall in one of two categories. Either they want to profit from the projected increases in S&P 500 volatility, or they want to protect against downturns in the stock market.

Note that while VIXY has a correlation to the VIX, it is not directly linked. As a result, it is common for VIXY results to be quite different from the VIX itself.

VIXY Explained

The fact that VIXY is based on futures contracts and not the actual VIX index is an important distinction. While fund managers make an effort to correlate the fund’s movement with the index, futures contracts may behave differently.

This is less of a problem for ETFs like VIXY that focus on short-dated futures, but it is something to consider as you build your portfolio.

How Does VIXY Work?

Shares of ETFs in general and VIXY in particular can be traded through nearly any brokerage account. One of the most important differences between Exchange Traded Funds and mutual funds is the fact that ETFs can be traded throughout the day, just like stocks.

Mutual funds, on the other hand, are only traded at the end of the day. When you are working with something that moves as quickly as VIXY, this distinction is critical.

VIXY Expense Ratio

As a general rule, Exchange Traded Funds have lower expense ratios than mutual funds, which makes them a popular alternative to more traditional investments.

VIXY has an expense ratio of 0.85 percent, which is on the higher side. The average expense ratio for a passively managed index fund is often just 0.2 percent. While actively managed portfolios have a relatively wide range, most experienced investors aim for a target of between 0.5 percent and .75 percent.

VIXY Stock Price History

While it seems likely that VIXY will perform well for the first quarter of 2020, it has not been a big winner historically. The fund launched on January 3, 2011, and returns since inception total a loss of (51.30) percent.

In the past five years, the fund returned a loss of (50.54) percent, and in the past three years, the loss was (47.32) percent. The one year return is reported at (67.81) percent, and in the fourth quarter of 2019, the fund lost (36.32) percent.

Is VIXY Safe?

Betting on the VIX isn’t considered particularly safe. In fact, these products fall into the high-risk category, and they are not intended to serve as part of a buy-and-hold strategy. That’s because for the most part, the VIX is low. It tends to spike when there are dramatic world events.

These spikes make VIXY a smart decision when a disaster threatens economic conditions. It offers a hedge against market downturns, because it tends to move opposite the market. VIXY can play an important role in protecting your current portfolio from further losses.

By temporarily adding VIXY, you may be able to offset a decline in the value of other assets.However, it is critical to keep an eye on the risks associated with these products – they can lose value suddenly, and the descent can be shockingly fast. The most sophisticated investors tend to hold shares in these funds for just a day before offloading them again.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.