Inverse VIX exchange-traded funds (ETFs) offer investors a straightforward way to bet against the future direction of market volatility. The Cboe Volatility Index (VIX), also known as the market’s “fear gauge,” is the most widely used benchmark of volatility.
Inverse VIX ETFs make use of complex financial strategies to move in the opposite direction of the VIX. Increasing economic uncertainty can cause investor sentiment to turn negative, and this in turn can lead to rising volatility. When volatility rises, the price of inverse VIX ETFs falls. But when the uncertainty subsides and optimism returns, volatility falls and this can cause inverse VIX ETFs to rise in value.
Key Takeaways
- The best (and only) inverse VIX exchange-traded fund (ETF) is the SVXY.
- The VIX has risen over the past year, largely driven by investor uncertainty over the war in Ukraine, inflation, and rising interest rates.
- SVXY uses futures contracts to provide short exposure to the VIX.
Inverse VIX ETFs are used mainly by sophisticated traders as part of a broader portfolio involving other highly technical trades. It is important to note that these are highly complex instruments with unique risks. They are intended for investors with very short-term time horizons and should not be used as part of a buy-and-hold strategy. Investors would be wise to carefully consider their own risk tolerance and risk capacity before considering whether to trade such securities.
Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark’s one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn’t expect it to return 10% in a year when its benchmark falls -10%. For more details, see this U.S. Securities and Exchange Commission (SEC) alert.
There are two inverse volatility ETF that trades in the U.S.: the ProShares Short VIX Short-Term Futures ETF (SVXY) and the -1x Short VIX Futures ETF (SVIX). SVIX was launched earlier in 2022 and doesn’t have a 1-year trailing total return, so it is not included in our screen. The VIX has risen 28.2% over the past year, with much of that increase occurring amid the war in Ukraine, inflation, and rising interest rates. There is no benchmark for SVXY, as it targets investment results on a daily basis and is not meant to be held long term. But for reference to the broader equity market, the S&P 500 has provided a total return of -5.4% over the past year, as of Aug. 22, 2022.
We take a closer look at SVXY below. All numbers below are as of Aug. 22, 2022. In order to focus on the fund’s investment strategy, the top holdings listed for ETFs exclude cash holdings and holdings purchased with securities lending proceeds except under unusual cases, such as when the cash portion is exceptionally large.
Leveraged ETFs can be riskier investments than non-leveraged ETFs given that they respond to daily movements in the underlying securities that they represent, and losses can be amplified during adverse price moves. Furthermore, leveraged ETFs are designed to achieve their multiplier on one-day returns, but you should not expect that they will do so on longer-term returns. For example, a 2× ETF may return 2% on a day when its benchmark rises 1%, but you shouldn’t expect it to return 20% in a year when its benchmark rises 10%. For more details, see this SEC alert.
- Performance Over One-Year: -4.3%
- Expense Ratio: 0.95%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 2,745,286
- Assets Under Management: $428.3 million
- Inception Date: Oct. 3, 2011
- Issuer: ProShares
SVXY is structured as a commodity pool, a type of private investment that combines investor contributions to trade commodities futures and options. Part of the complexity of inverse volatility investments is that the VIX cannot be directly purchased or sold. Instead, inverse VIX ETFs must short the VIX indirectly. In the case of SVXY, this is done by shorting VIX futures contracts. In doing so, the goal of the fund’s managers is to achieve daily returns, before fees and expenses, that are equal to -0.5× the daily performance of the S&P 500 VIX Short-Term Futures Index. If the index rises a given amount on a particular day, then SVXY is expected to fall by half that amount, and if the index falls during the day, then SVXY should rise by half of the index’s decline. The fund maintains a daily reset feature leading to the compounding of returns when held over multiple holding periods. It is therefore meant as a short-term trading instrument used by sophisticated investors with a high tolerance for risk, rather than as part of a long-term, buy-and-hold strategy.
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