A pair of ETFs linked to the volatility of the S&P 500 index were launched today. The ProShares VIX Short-Term Futures (NYSE: VIXY) and VIX Mid-Term Futures (NYSE: VIXM) provide exposure to equity market volatility by seeking to match the performance of their respective VIX futures indexes.
VIXY is linked to the performance of the S&P 500 VIX Short-Term Futures Index, which targets a constant, weighted-average term of one month.
VIXM is linked to the performance of the S&P 500 VIX Mid-Term Futures Index, which targets a constant, weighted-average term of five months.
Both volatility ETFs have annual expense ratios of 0.85%.
“Until now, to access volatility, many investors have considered exchange traded notes (ETNs), which subject them to the credit risk of the note’s issuer,” said Michael L. Sapir, Chairman and CEO of ProShare Capital Management, the sponsor of the funds. “Now, for the first time, investors can access volatility with a U.S. exchange-traded fund.”
Since investing directly in the VIX Index isn’t possible, investment firms like Barclays, Credit Suisse, Citigroup, and UBS have been rolling out volatility based products in an ETN wrapper. While ETNs are generally faster to launch, they have significant caveats like credit and taxation risk. Also, many ETNs have thin trading volume which increases their trading costs.
Buying VIX futures contracts is another alternate method for getting exposure to the VIX but it requires a futures brokerage account.
The new ProShares Volatility ETFs compete directly with the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) and iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) which have amassed more than $2 billion in assets.
2010 was a bad year for both VXX and VXZ as both notes suffered double digit losses from contango and declining volatility in stocks. Contango happens when the price for futures contracts his higher than their spot price. Both notes charge annual expenses of 0.89%.
While most exchange-traded products are focused on the VIX index with various durations (short, mid and long-term), others have attempted to provide leverage and inverse performance.
In the fourth quarter, the VelocityShares became the first provider to offer daily inverse and daily 2x leveraged exposure to the S&P 500 VIX Futures Index. The VelocityShares Daily Inverse VIX Short-Term ETN (NYSE: XIV), VelocityShares Daily Inverse Mid-Term ETN (NYSE: ZIV), VelocityShares Daily 2x VIX Short-Term ETN (NYSE: TVIX), VelocityShares Daily 2x VIX Medium-Term ETN (NYSE: TVIZ) were launched.
The VelocityShares notes charge annual fees between 0.89% to 1.65% and Credit Suisse AG is the issuer of the ETNs.
This article is brought to you by ETFguide.com. ETFguide is the information leader on exchange-traded funds because of its vendor-neutral approach and its progressive reporting style. Unique features include an ETF bookstore, a monthly e-mail newsletter, and subscription based ETF portfolios.
