Volatility is an important but dangerous component of investing. On the one hand, the ability of a security’s price to fluctuate back and forth around an average gives investors the opportunity to profit by strategically buying or selling that security. To look at it a little differently, assets that investors generally consider “volatile” tend to attract investors who are more willing to take on risk; in this sense, volatility is an important way for an investor to assess the suitability of a particular asset based on their risk tolerance.
However, volatility is also notoriously complex and difficult to estimate. An investor who can consistently and accurately understand the effects of volatility can have a huge advantage over competitors, but of course, this is too good to be true. So how can volatility work for the retail investor to minimize risk?
Investors often look to the Chicago Board Options Exchange’s CBOE Volatility Index (VIX) to measure volatility—the VIX uses the price of S&P 500 options to estimate the implied volatility of the S&P 500 over the next 30 days. Because option prices tend to rise when investors are worried about something in the market, the VIX often rises when the S&P 500 index—and, in most cases, the broader market index—falls, and vice versa. Because of this trend, investors often refer to the VIX as the fear index.
Investing in the VIX using exchange-traded funds (ETFs) is a popular way to capitalize on changes in investor fear and anxiety about the market. Looking ahead to 2025, there are indeed many reasons why investors might be concerned about the health of the market, from domestic and international political issues to ongoing global conflict and more. Below are three exchange-traded volatility products based on the VIX that experienced investors with a deep understanding of volatility may want to consider at this time.
iPath Series B Short-Term S&P 500 VIX ETN Futures
iPath Series B Short-Term S&P 500 Futures VIX ETN Today
iPath Series B Short-Term S&P 500 VIX ETN Futures
- Assets under management
- $276.27 million
One of the primary means for investors to access the VIX is the iPath Series B S&P 500 VIX Short-Term Futures ETN. Bats: VXXexchange-traded note for first and second month VIX futures. VXX has a daily trailing long position, which means it is not suitable for buy-and-hold trading. Its focus on short-term VIX futures correlates it with the index, but will still likely deviate from direct investment in the VIX (although the latter is not possible for investors, but only hypothetically).
For investors, this means that VXX can be a powerful tool for capitalizing on short-term spikes in anxiety among investors: when anxiety rises and stocks fall, VIX (and VXX, respectively) should rise.
Simplify Volatility Premium ETF
Simplify Volatility Premium ETF Today
Simplify Volatility Premium ETF
As of 01/17/2025 16:10 Eastern
- 52 week range
- $19.41
▼
US$23.14
- Dividend yield
- 18.55%
- Assets under management
- $1.19 billion
While VXX takes a daily long position in VIX, Simplify Volatility Premium ETF NYSEARCA:SVOL takes a short position, which means it rises with the market when the VIX falls. SVOL was designed as a means of generating income in a low-yield environment and aims to achieve exposure of -0.2x to -0.3x on short-term VIX futures.
SVOL is also best suited for short-term play and can be a good way for investors to take advantage of reduced investor anxiety during local market upturns. Its small inverse leverage ratio is intended to mitigate wild swings in VIX volatility. While SVOL remains a challenging investment for sophisticated volatility-focused investors, these measures help minimize risk where possible.
ProShares Ultra VIX Short-Term Futures ETF
ProShares Ultra VIX Short-Term Futures ETF Today
ProShares Ultra VIX Short-Term Futures ETF
As of 01/17/2025
- Assets under management
- $249.61 million
At the other end of the spectrum from SVOL is the ProShares Ultra VIX Short-Term Futures ETF. Bats: UVXY due to leverage on short-term VIX futures. Notably, a leveraged VIX ETF like this one offers another layer of amplification to broader market swings—the VIX typically moves further than the S&P 500 even when the latter is seeing price action.
This is all to say that, like both of the above products, UVXY is particularly ill-suited to buy-and-hold trading. This is a powerful tactical tool that allows you to take significant advantage of the short-term spikes in investor anxiety that accompany and sometimes precede a decline in the S&P 500 Index.
Given the potential for market changes in 2025, investors may be wise to consider how to safely and effectively play on changes in investor concerns. Volatility funds and similar products can offer exceptional returns to cautious and knowledgeable investors.
Before you consider the iPath Series B S&P 500 VIX Short-Term Futures ETN, you should hear this.
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