Volatility Shares, a newly minted ETF issuer, has made its debut by launching a pair of funds in the US providing inverse and leveraged exposure to short-term VIX futures.
The VIX is an uninvestable index that measures the market’s expectation for volatility in US large-cap equities over the next 30 days. It is derived from implied volatility in near-term S&P 500 options contracts.
VIX futures, meanwhile, are liquid volatility products based on the VIX which allow investors to manage their volatility exposure independent of the direction of the stock market.
The new funds from Volatility Shares are the -1x Short VIX Futures ETF (SVIX US) and 2x Long VIX Futures ETF (UVIX US).
SVIX is linked to the Short VIX Futures Index, which references the daily inverse (-100%) performance of a long-only portfolio of short-term VIX futures contracts. UVIX, meanwhile, delivers twice (+200%) the daily performance of the Long VIX Futures Index, which similarly references a long-only portfolio of short-term VIX futures.
The funds have been listed on Cboe BZX Exchange with management fees of 1.35% and 1.65% for SVIX and UVIX, respectively, although the ETFs’ prospectus documents note that total fees may be as high as 1.98% and 2.78%.
The ETFs replicate strategies that were hugely popular with institutional investors when offered by Credit Suisse in ETN format, namely as the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and VelocityShares Daily 2x VIX Short-Term ETN (TVIXF).
Both ETNs are no longer trading, however. XIV effectively imploded during the February 2018 spike in US equity market volatility, a period that has subsequently been named ‘Volmageddon’. TVIXF, meanwhile, was shuttered in mid-2020 amid criticism of the product’s performance during recent Covid-19 volatility and wider skepticism of the suitability of the ETN structure for inverse and leveraged exposures.
The Volatility Shares ETFs, however, have been designed to address the flaws of these past products. The funds have undergone two years of regulatory scrutiny before the US Securities and Exchange Commission finally gave them the green light.
Firstly, similar to all ETFs, the funds are backed by underlying assets and are not subject to counterparty risks inherent in ETNs which are actually unsecured debt obligations. This makes them far less likely to blow up or be withdrawn without notice during periods of heightened market stress.
Secondly, the ETFs’ underlying indices determine their daily settlement prices from a time-weighted average of prices recorded over the last 15 minutes of the trading session, or even longer if required. This compares with the previous products that would just use the 4 p.m. settlement price, potentially leading to larger spikes if there was panicked trading right at the day’s close.
Investors should note, however, that all inverse and leveraged ETFs are typically suitable only for sophisticated traders who understand the risks involved, in particular how these products tend to decay in value if held for an extended period of time.