Top 3 Volatility ETFs for Active Traders

Interested in Trading Risk-Free?

Build your trading muscle with no added pressure of the market. Explore TradingSim For Free »

In this article, I will provide the history and top VIX ETFs. Lastly, I will discuss the top 3 VIX ETFs for active traders. An active trader is someone that day trades or swing trades throughout the year.

What is the VIX or Volatility 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 expiration and options that are expiring the next month.

The indicator is also referred to within the trading community as the fear index. This is because heavy selloffs produce a spike in the VIX.

CBOE VIX Volatility Index

Learn to Trade Stocks, Futures, and ETFs Risk-Free

An important point as you look at the above graph of the VIX is that there is no direct correlation with the price action of the S&P500. For example, the market could make a minor move, but options traders could be prepping for a selloff and there is a spike in put options which sends the VIX climbing.

General Rules of Thumb

While the price action does not mirror the index, here are a few rules of thumb.

  • If the VIX plummets, the market is bullish.
  • Spikes to the upside imply the market is in bearish territory.

I remember looking at the indicator in the early 2000s. A spike above 60 pretty much-called market bottoms and readings in the 20s would predict market corrections.

But since we have been on this nearly 10-year bull run, low readings in the VIX don't mean as much.

What's the Difference Between VIX Products and Other Securities

The one main difference is you can buy a stock and it can increase many multiples. For example, whoever had the presence of mind to buy and hold Apple is a genius.

Now, the VIX will have nice price swings, but these are within a range. What I mean by this is the VIX is not going to go from 30 to 200 and then trade within that 200 range for an extended period of time. At some point, the indicator is going to come back down to earth.

Again, this is a measure of forward option activity and options do not stay at sustained levels to the low or high side for very long.

Develop Your Trading 6th Sense

No more panic, no more doubts. make the right decisions because you've seen it with your trading simulator, TradingSim.

Let's look at a few charts to further illustrate this point.

VXX Chart

VXX Chart - iPath S&P 500 VIX ST Futures ETN (VXX)

XVZ

XVZ = iPath S&P 500 Dynamic VIX ETN

As you can see from both of these charts while there is movement, you are not going to get the up and to the right action like ETFs that mirror a market index or a growth stock.

Why Do Traders and Investors Trade VIX Products?

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 and investors.

Day Traders

For day traders, volatility gives them the opportunity to trade securities like the TVIX which have a lot of liquidity. This allows traders to get in and out of the market quickly throughout the day.

Investors

While this article covers active investors, volatility is used as a hedging tool to protect their long term investments.

Learn to Day Trade 7x Faster Than Everyone Else

What is the Best Volatility ETF?

Types of Volatility ETFs (Source - ETF.com)

Types of Volatility ETFs (Source - ETF.com)

You can go long or short. You also have the option of looking at short-term, mid-term and inverse futures.

This is a pretty exhaustive list. Like everything else in the market, it's always a good idea to focus in on one or two instead of trying to boil the ocean trading every security.

Categories of Volatility ETFs

Let's group these ETFs into subcategories to make things clearer.  Please note some of these tickers could be inactive as the ETF has fully matured. If so, you will need to do a bit of research to locate the latest ticker.

Standard Volatility ETFs

Below is a list of standard volatility ETFs which track short-term and mid-term futures.

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 those which are leveraged and inverse.

Leveraged Volatility ETFs

The leveraged volatility ETFs offer a magnified exposure to the VIX. These instruments can provide amplified returns but they come with larger expense ratios which can exceed 1%.

Stop Looking for a Quick Fix. Learn to Trade the Right Way

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 ETFs

Inverse volatility ETFs move in the opposite direction of the VIX. Please make sure you read later in the summary section of this article how that at times can be risky.

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 Top 3 Volatility ETFs for Traders

This is a pretty big statement, so let me qualify this before we go any further.

I am going to list out the five volatility ETFs that are the most active on a daily basis. Essentially these are the ones which come up on my scan on a daily basis. These are great for getting in and out of trades with ease.

  1. ProShares VIX Short-Term Futures ETF (VIXY) is no doubt one of the top VIX ETFs to trade. The ETF has an average daily volume of 1.9 Million and over 200 Million in total assets.

    VIXY

    VIXY

  2. VelocityShares Daily 2x VIX Short-Term ETN (TVIX) is a leveraged ETF. This means for every point move in the VIX, the ETF moves double in value. I personally stay away from leveraged ETFs because of the increased volatility. ETF has an expense ratio of 0.85%. The VIXY does not represent a spot investment in the VIX, but rather is linked to an index comprised of VIX futures.
TVIX

TVIX

  1. The ProShares Ultra VIX Short-Term Futures ETF (UVXY) this is essentially the same as the TIVX, it's just offered by a different company. Both the UVXY and TVIX have the same expense ratio of 1.65% but the UVXY has an average daily volume of 17M, which is almost double that of the TVIX.
UVXY

UVXY

In Summary

VIX related ETFs are not meant to be a long-term investment. These instruments are for traders and not for a 401k plan.

If you disagree with me, please check out this article which covers the fallout of the XIV ETF by Credit Suisse Bank. This was an inverse ETF to the VIX and when the market sold off, the VIX spiked. This led to the XIV dropping a whopping 90% in a matter of days.

Again, great for short-term traders, but not something for value investors to park their money.

How Can We Help

If you are contemplating trading these securities, you can test out your strategies within Tradingsim. We have all of the VIX ETFs for you to see which one is best aligned to your trading style.

Put Your New Knowledge to the Test

Want to practice the information from this article?
get trading experience risk-free with our trading simulator.

Visit TradingSim.com
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.
follow me

Leave a Reply

Your email address will not be published. Required fields are marked *

Comment will be published after moderation