USA Volatility Funds Categorized and Ranked

It’s been over 10 years since VXX, the first volatility exchange-traded product arrived on the market.  Since then 36 additional funds, using both Exchange Traded Notes (ETNs) and Exchange Traded Funds (ETFs) structures have been introduced.  Terminations and closures have whittled that list down to 17 (as of 23-May-2019).

The remaining funds can be segmented into four major categories:

  1. VIX Trackers
  2. Hybrid Strategies
  3. Inverse Volatility
  4. Medium Term / Volatility Hedges

Below I’ve collected and to some degree ranked the funds within each of these categories.  I’ve tried to be analytical about this, but I don’t pretend to be unbiased. I think everyone carries bias whether they admit it or not.  The factors that seemed preeminent when ranking were:

  • Does the fund do what the user expects?
  • Is the fund big enough to have reasonable bid/ask spreads and be an attractive business for the company to support?
  • Is the fund closely tracking its index?

I included other data (e.g., ETN vs ETF, option availability) that didn’t significantly impact my rankings, but might be useful information.  For more information on all of these funds, including company websites and fund prospectus see volatility tickers.

VIX Trackers

In this segment, the user wants the fund to track the percentage moves of the CBOE’s VIX index as closely as possible.  Other than impossibly slow learners, everyone else has figured out that these funds are only suitable as very short term investments (days at most) because they are typically ravaged by the roll losses associated with contango in the VIX futures that underlie these funds.  UVXY, for example, has had a compound annual growth rate of -93% since its inception in October 2011.

RankTickerMatch VIX
daily % Moves
DescriptionAUM $
ETN/ETF
(Options)
Notes
1TVIXDecent2X Short TermETN
2UVXYOK1.5X Short TermETN (options)
3VXXFair1X Short TermETN (options)Not covered under
OCC portfolio margin
Program
3VIXYFair1X Short TermETN (options)
3VIIXFair1X Short TermETN (options)

Hybrid Strategies

After a late start volatility funds that blend long and short volatility positions have done well, pulling into second place with combined assets of over $1.169 billion. There are two basic flavors of the hybrid funds, one type attempts to hold its value or even gain a little during bull markets but shine during big corrections/bear markets.  I call these the “Hybrid-long” funds, because they are strategically long volatility.  The funds that fall into this category are shown below:

Hybrid-long

RankTicker% CAGR since inceptionDescriptionAUM $M (Dec 2012)AUM
$M
(Sep 2014)
ETN / ETFNotes
1PHGD7.0%
(Dec 2012)
Same as VQT3416ETF(options) Div Yield 1.6%,
2VQT10.4%
(Sep 2010)
Mix of S&P 500 +  short term394640.5ETNDetails
3XVZ-18.8%
(Aug 2011)
Mix of short and medium term vol26522.1ETNIncreased contango in mid term VIX futures has really hurt this fund


Given the lack of big negative market moves the last three years it’s not shocking that these funds haven’t  shown big gains, but I am surprised that the VEQTOR based funds (VQT & PHDG) have not done better given their high allocation into the S&P 500 (as high as 97.5%) during quiet markets.  Even allocations as low as 2.5% to long volatility have dragged returns down significantly.  In 2013 the S&P 500 went up 26.5%, while VQT went up 12%.

 Inverse Volatility
It was only natural that funds emerged to take advantage of the painful erosion that VIX tracker funds suffer most of the time.  Of course you can short VIX trackers directly, but they are often tough to borrow, many investors can’t (e.g., in an IRA) or won’t short them.  In addition, without re-balancing, a successful short position loses leverage.    These inverse funds re-balance daily, so their leverage stays at -1X.   The challenge with an inverse position is not getting toasted when volatility spikes.

RankTicker% CAGR since inceptionDescriptionAUM $M Dec-12AUM
$M
Sep- 14
ETN / ETF (Options)Notes
1ZIV+39.3%
(Nov 2010)
Inverse medium term16133.5
(8.3X growth)
ETNA medium term position provides much of the upside with much less volatility
2XIV+45.5%
(Nov 2010)
Inverse short term378593.2
(1.56X growth)
ETN
2SVXY+67.8%
(Oct 2011)
Inverse short term82198
(2.41X growth)
ETF
(Y)


The unremitting bull market the last couple of years has been very kind to the inverse volatility funds.   Things will get rough at some point—these are not buy and hold investments unless you have a stomach of steel. Alternatively have an exit strategy or an effective hedge strategy in place.  

Medium Term / Volatility Hedges

The medium term volatility funds invest in the 4 to 7 month VIX futures.  They used to be a good way to bet on longer term volatility trends, or to hedge short positions in short term volatility.  However starting in 2010 the contango in medium term VIX futures started being a significant drag on these funds.  Recently that drag has been in the 2% to 3% per month range. See VIXCentral for the current numbers.

RankTicker% CAGR since inceptionDescriptionAUM $M Dec-12AUM $M
Sep- 14
ETN / ETF(Options)
1VXZ-30.9%
(Jan 2009)
Medium term7061.6ETN
(Y)
1VIXM-35.7%
(Jan 2011)
Medium term4443.2ETN(Y)
2VIIZ-35.8%
(Nov 2010)
Medium term51.5ETN
2TVIZ-62.5%
(Nov 2010)
2X Medium term2.9ETN

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5 thoughts on “USA Volatility Funds Categorized and Ranked”

  1. Vance,

    Thanks for the great site. One thing to mention is that Powershares states in PHDG FUND DETAIL bullet points. * No K-1, issues 1099.

    invescopowershares.com/hedge

    Dan

    Reply
  2. I had high hopes for XVIX.  Unfortunately, as you suggest, the increased medium term contango is kililng the product.  Interestingly, and I guess predictably, the same change that hurt XVIX has really put a wind to the back of ZIV.

    Reply
    • Hi Steve, In addition to XVIX’s problems it’s distressing to see XVZ get eroded too. I can see a place for “actively managed” volatility funds that tweaked their strategy once or twice a year based on the prevailing term structures. Setting these parameters once by backtesting is a flawed strategy.

      — Vance

      Reply

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