Collectively, these products – linked to two S&P 500 VIX Futures Indices – have amassed almost $3bn (£1.9bn) in assets globally.
Prior to 2009, the only way to take a position on the VIX was through the use of options, futures or OTC vehicles, such as variance swaps. That changed with the launch of the S&P VIX Futures Index Series, which means markets participants can trade the instruments in the stock market like any other common stock.
Despite the growth in use of these products, S&P Indices research found that there still remains confusion about their relationship with spot VIX, which moves more than futures and so also the two VIX futures indices. Overall, the Short-Term index has a beta of 43.14% with the VIX spot, and the Mid-Term index has a much lower beta of 21.14%.
The paper’s authors, Berlinda Liu, director, and Srikant Dash, managing director, concluded: “Because spot VIX is not directly investable, ETFs and ETNs linked to S&P 500 VIX Futures Indices have emerged as a popular tool to gain exposure to the volatility market for a broad cross-section of market participants.
“These instruments have a similar negative correlation profile to the equity market, and have the same directional hedge and portfolio diversification properties as spot VIX. However, the beta of these indices with spot VIX is much less than 1, which results in lower magnitude moves than spot VIX. There are also significant roll losses – ranging from 0.07% to 0.18% per day – associated with holding these instruments. It is important to factor these term structure losses into portfolio construction decisions.”