David Fabian | Dec 02, 2015 06:18AM ET
The CBOE VIX Volatility Index is an interesting animal that has grown to become one of the most heavily watched indicators of fear and greed in the market. This index functions by measuring near-term volatility expectations from options activity on the S&P 500 Index. It’s calculated on an intra-day basis, so investors are able to watch as implied volatility expands or contracts in real time. The CBOE has a nice primer on how this is accomplished that you can read here .
As many ETF investors know, you can’t invest directly in an index. So the forward-thinking asset managers at Barclays (L:BARC), ProShares, and VelocityShares set out to create several products to help you invest in the movement of the VIX Index. According to data from ETF.com, there are currently 20 dedicated exchange-traded funds and exchange-traded notes that attempt to track this index with varying degrees of success.
The two largest funds in this space are the iPath S&P 500 VIX Short-Term Futures ETN (N:VXX) and VelocityShares Daily Inverse VIX Short Term ETN (O:XIV). Both of these funds currently have over $1 billion in assets under management. VXX is a bet on the expansion of volatility, which typically comes during a correction or choppy stock market action. Conversely, XIV is an inverse play that rises when volatility contracts. This fund is intended to move higher as stocks move higher and greed takes a more prominent position in investor sentiment.
There are also many other flavors of VIX funds that offer varying degrees of unique tracking and index construction methodology. Nevertheless, XIV and VXX work well as benchmarks to understand this unconventional asset class. I have been watching and even invested small amounts in these funds for my personal accounts at one point or another and these are the lessons I have learned from the experience.
The bottom line is that these products are primarily geared for advanced users with a high tolerance for risk and sophisticated knowledge of the markets. Those that choose to dabble in these funds should only do so with a well-defined risk management plan that protects your capital in the event of a reversal.
Disclosure: FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.
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