The 5 Best Volatility ETFs for Day Traders

Volatility is a topic in the stock markets that never really goes way. In fact volatility can be considered to be the constant regardless of which way the broader markets are moving, or the factors responsible for moving the markets.

Investors and traders alike either try and avoid volatility or profit from it and similarly, volatility offers opportunities for traders and investors to make profits, regardless of the markets or the securities that they are trading, but can also lead to significant losses as well.

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The importance of volatility for investors and traders is reflected by the fact that there are numerous volatility based products. From exchange traded funds that track volatility, to futures and options such as the CBOE VIX Volatility Index, the data only underpins the fact that volatility is an asset that can be used to make money.

Exchange traded funds allows investors and day traders the option to monitor a particular ETF’s price which can be used as a proxy for the markets. For example, the SPDR S&P500 ETF (SPY) is a well know ETF and one that is closely watched by many as a proxy for tracking the S&P500 index.

Besides this rather passive approach, investors and day traders can look at actively trading the ETF’s to generate higher returns.

What is volatility and how is it defined?

The classic textbook definition of volatility is defined as the rate at which the price of a security rises or falls for a given amount of returns that it generates. Volatility is quantified as the standard deviation of the annualized returns for a given period of time and shows the range to which the price of a security can rise or fall.


Volatility is used in the financial markets because it measures how risky a security can be. Volatility is an important variable and is used in the options pricing formula to determine the deviations in the returns of the asset that it is applied to.

When the price of a security fluctuates rapidly within a short span of time, the security is said to have high volatility and if the price of a security fluctuates slowly in the same time frame, it is said to have low volatility.

What is VIX or Volatility Index?

VIX or Volatility Index is the core around which you have many different types of products. VIX is also known as the CBOE volatility Index (VIX) and is referred to as the fear index. VIX is calculated based on the implied volatility of a group of options on the S&P500, which includes options that are nearing their expiry and the options that are expiring the next month.

CBOE VIX Volatility Index

CBOE VIX Volatility Index

The concept of VIX is to come up with a number of options that represents the level of volatility that the options market is expecting over the next 30-days.

An important aspect about VIX is that there is no direct correlation between the S&P500 volatility and the VIX and there are instances when options traders are merely panicking sending VIX higher and on the same note, it is possible for options traders to completely miss out on the volatility and remain sanguine while the markets actually start going bonkers.

The VIX is unique because when the markets rise, the VIX falls and vice versa. Typically, rising VIX means that markets are due to make a substantial decline. You can see how VIX and VIX based investment products are used by investors as a hedge against market uncertainty.

VIX is also unique because you cannot “buy” the VIX like you would for example, buy the stock for Microsoft or buy a futures oil or gold contract. VIX futures contracts are based on the value of the VIX, which is determined by the options traders. Thus, VIX futures are simply a bet on what options traders predict the volatility of S&P500 will be 30 days from now.

Why do investors and traders prefer to trade volatility?

The funny thing about volatility is that it is not a commodity or a stock. Yet, despite this rather distinguishable factor, volatility is often a sought after security among day traders as well as investors.

For day traders, trading volatility gives them the opportunity to make profits in a short span of time. For investors, volatility is used as a hedging tool to protect their long term investments.

While volatility can be risky, some traders prefer to trade volatile stocks or securities. This is because given the nature of such stocks, the ability to make quick profits increases tremendously. After all, there is not much of profit to be made if a security's price remains trading flat or within a tight range.

The importance of volatility is seen not just in the number of financial tradable products that are available, but also in the number technical and fundamental indicators that have been developed over time.

Although the ETF's and the futures and options volatility based products track more or less the same thing, there are different types of volatility based products. Investors and traders should therefore not make the mistake of treating all volatility based products equally.

While volatility is risky, investors and traders alike prefer to trade volatility for a number of reasons, mean reversion being one of them.


Mean reversion is a concept where a security's price will move towards its average price over time. Volatility is a classic security where the reversion to the mean is strong.

When volatility spikes, the volatility readings are expected to fall back or revert to the average or mean prices. Similarly, when volatility falls, it is expected to rise back to the mean prices.

However, not all volatility based securities are mean reverting and varies from one type of security to another. Spot VIX tends to revert to the mean, while VIX futures do not because the futures curve prices in the mean reversion already.

How to choose volatility ETF?

Types of Volatility ETFs (Source - ETF.com)

Types of Volatility ETFs (Source - ETF.com)

There is no doubt on the number of volatility ETFs that one can choose from these days along with variations of the same product. For example, investors have the choice to select inverse volatility ETF which is a product that moves in the same direction as that of the market or simply choose to trade regular volatility ETFs which move inversely to the direction of the stock market.

Besides inverse volatility ETFs, there is also leveraged volatility ETFs where the inbuilt leverage into the pricing allows investors and day traders to make big profits. As with all things that have to do with leverage, such type of ETF's are no doubt risky.

For day traders, it is best to choose ETFs that have high volume which will enable you to day trade with ease. Furthermore, day traders need to focus on select ETF’s which also have certain characteristics including the way the ETF tracks volatility.

The spread also matters along with the expense ratio, which are two other qualification criteria that day traders must focus on when choosing a volatility based ETF for day-trading.

Top Volatility ETFs for day traders

Day traders can choose for the following top five volatility ETFs for day trading, based on factors such as the total assets under management, expense ratio and of course their popularity. These volatility ETFs are selected based on the assets under management and having reasonable expense ratios, making them ideal for day traders.

 

SymbolETF NameTotal Assets*YTDAverage VolumePrevious Closing Price
VXXiPath® S&P 500 VIX Short-Term Futures ETN1055234.5-31.24%3895933217.54
VIXYProShares VIX Short-Term Futures ETF150716.7-31.28%267101114.61
XIVHVelocityShares VIX Short Volatility Hedged ETN4614030.07%216145.89
VIXMProShares VIX Mid-Term Futures ETF39645.9-17.12%2627135.09
VXZiPath S&P 500 VIX Mid-Term Futures ETN34022.2-16.90%13361928.96

Besides the classic volatility based ETFs there are other variations as well.

The leveraged volatility ETFs offer a magnified exposure to the VIX. Trading leveraged volatility ETFs are risky as they can generate amplified returns compared to other ETFs. The expense ratio for the leveraged ETFs is more than 1%, making them a tad expensive than the normal.

SymbolETF NameTotal Assets*YTDAverage VolumePrevious Closing Price
UVXYProShares Ultra VIX Short-Term Futures ETF435972.4-53.99%1345731320.13
TVIXVelocityShares Daily 2X VIX Short-Term ETN195975.3-53.78%138558004.4
TVIZVelocityShares Daily 2X VIX Medium-Term ETN1795.4-31.69%118945.13

Inverse volatility ETFs are, as the name suggests used to make profits from the opposite direction of the VIX movement. Inverse VIX index are also another way day traders can trade volatility, with the basic difference being that these inverse ETFs move opposite to VIX, which traders need to bear in mind.

Some of the top inverse VIX ETFs are as follows.

SymbolETF NameTotal Assets*YTDAverage VolumePrevious Closing Price
XIVVelocityShares Daily Inverse VIX Short-Term ETN548608.842.07%1387524266.42
SVXYProShares Short VIX Short-Term Futures ETF357304.541.56%3137016128.79
ZIVVelocityShares Daily Inverse VIX Medium-Term ETN82897.319.53%3712755.63

The Five best Volatility ETFs for day traders

  1. The VXX iPath S&P500 VIX Short-term futures ETN is no doubt one of the top VIX ETFs to trade as it has one of the biggest volumes and asset under management. The expense ratio is also reasonable at 0.89%. Day trading the VXX VIX futures can be based on price action techniques as well as looking at the fundamentals of the broader market.
VXX iPath S&P500 VIX Short term futures ETN

VXX iPath S&P500 VIX Short term futures ETN

  1. The ProShares VIX Short-term futures ETF trades for under $20.00 and has an expense ratio of 0.85%. The S&P500 VIX short term futures index, tracks this particular index and has $150.7 million assets under management. The VIXY does not represent a spot investment in the VIX, but rather is linked to an index comprised of VIX futures.
ProShares VIX Short-Term Futures ETF

ProShares VIX Short-Term Futures ETF

  1. The VelocityShares VIX Short Volatility Hedged ETN (XIVH) is slightly expensive as it comes with a 1.30% expense ratio and the ETN trades around $45.00. The XIVH has total assets under management of $46.1 million. It is also a relatively newly launched ETN having around 30% ytd returns. Despite being newly launched, the XIVH are ideal for day trading.
  2. The ProShares Ultra VIX Short-Term Futures ETF (UVXY) is a leveraged exposure to the short term VIX futures contracts. The UVXY ETF has an expense ratio of 0.95% and trades around $20.00 with about $436 million assets under management. The UVXY offers a two times leverage, meaning that the returns one can expect is two times that of the movement on the VIX futures contracts.
ProShares Ultra VIX Short-Term Futures ETF

ProShares Ultra VIX Short-Term Futures ETF

  1. The VelocityShares Daily Inverse VIX Short-Term ETN (XIV), as the name suggests is an inverse VIX short term ETF. The XIV ETF moves in the general direction of the stock market (because it is inverse VIX ETF) and is best used in a bull market for the stocks as it moves in the general direction of the market. XIV is however not as simple as going long as it behaves differently and tends to outperform even during normal flat market conditions. The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) has an expense ratio of 1.35% with $548.6 million in assets under management.
VelocityShares Daily Inverse VIX Short-Term ETN

VelocityShares Daily Inverse VIX Short-Term ETN

In conclusion, the volatility ETFs allows day traders to make very decent profits, depending on what type of the above mentioned ETFs is used for trading. Unlike looking at ETFs as a way to monitor the broader stock market strength, day traders can take advantage of the volatility and pick and choose the appropriate volatility ETF such as the inverse or the leveraged ETFs to make larger profits.

However, as with everything in investing, volatility based ETFs are risky and day traders should pay attention to this, especially when trading the inverse or the leveraged ETFs. Because volatility can come unannounced in many cases and as mentioned earlier in this article that the VIX futures contracts are merely a bet on what option traders think about volatility, day traders should be careful and employ good risk management techniques which can yield bigger returns than trading the normal stocks or investing in ETF’s that tracks the benchmark stock indexes.

Al Hill Administrator
Co-Founder Tradingsim
Al Hill is one of the co-founders of Tradingsim. He has over 18 years of day trading experience in both the U.S. and Nikkei markets. On a daily basis Al applies his deep skills in systems integration and design strategy to develop features to help retail traders become profitable. When Al is not working on Tradingsim, he can be found spending time with family and friends.
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