With scores of volatility-related exchange-traded products (ETPs) now available, critics would argue that this corner of the space has become too crowded. But those thinking about adding leverage to trades that are volatility-driven in the first place may want to consider the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY).
There are a slew of leveraged volatility ETPs. In fact, there was one day in late 2010 when eight volatility ETPs debuted. It is like ordering a volatility sundae and asking for extra whipped cream.
UVXY, which went live in late 2011, attempts to deliver double the daily returns of the S&P 500 VIX Short-Term Futures Index — but as is the case with traditional leveraged ETFs, this one comes with some warnings traders would do well to heed.
UVXY “seeks a return that is 2x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks,” ProShares says.
Put simply: If you hold this fund for a while, you should not expect a perfect 2x result compared to its base index.
A Trade, Not an Investment
It is a frequent warning with leveraged ETFs, but one that bears repeating with UVXY: These products are intended to be used over intraday trading periods, maybe over a few days at the most.
Turning a trade in UVXY — which is based on futures contracts on the CBOE Volatility Index (aka VIX, aka the “Fear Index”) — into a long-term investment can lead to ruinous performance. Consider that in the prior 12 months of trading alone, UVXY is down 90%. In fact, this fund tanks so regularly that it has executed numerous reverse splits over the past few years just to maintain a nominal trading price in double digits.
UVXY still is popular with traders, as highlighted by average daily volume of nearly 29 million shares, which translates to more than $900 million in dollar terms.
Also note that UVXY holds front- and second-month futures, meaning it is a structured as a commodities pool. That subjects investors to the unpleasant K-1 form at tax time.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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