ProShares Ultra VIX Short-Term Futures (UVXY) is a listed ETF which provides investors leveraged exposure to the SP 500 VIX index. In short, the fund tracks the performance of the SP 500 VIX – a popular measure of the markets volatility. UVXY tends to increase in value when the market falls, as investors move to buying put options on SP 500 listed companies as protection. This sentiment shift in options puts, increases the overall volatility of the market hence increasing UVXY price. UVXY recently peaked investor interest last week as the SP 500 turned negative after a monumental bull run. With more investors intrigued in UVXY, we will breakdown what you need to know about the fund.
Table of Contents 1. Introduction 2. Breakdown on how UVXY works 3. Key factors to take away from this article
Breaking down how UVXY tracks VIX futures is crucial for understanding the movements of the ETF.
When following volatility, investors would like to mirror the CBOE Volatility Index VIX. However, there are no securities that provide identical tracking performance. Hence, investors use options, or in UVXY’s case, VIX futures, to capture volatility.
UVXY will hold a mix of VIX futures each day to reach to 1.5x leverage. However, each day the ETF will hit a reset button, and the UVXY fund manager must sell existing futures and buy new ones to maintain the 1.5 leverage. Accepting this feature blindly is dangerous. Because to maintains UVXY’s leverage, fund managers must carry out contango on VIX futures.
To put it simply, contango is when next month’s future is higher than the current months. For example, January futures are $15, but February futures are $17. In this scenario, the fund manager is selling January’s futures and buying February’s futures to maintain the mix (1.5 leverage). However, $15 only allows you to buy 88% exposure (15/17) to Febuary’s futures. Hence, over time the exposure decreases, and the UVXY peters to zero, theoretically.
Overall the daily leverage makes UVXY still an incredibly volatile product. Understanding the relationship is a must before investing. YIG strongly suggests conducting more research on the UVXY and VIX futures connection before investing.
Key Takeaways regarding UVXY
There are a few key factors to understand before considering an ETF like UVXY
- UVXY is an ETF that decays in value over time. The financial instrument was designed to be held for very short periods of time, as it does not generally fluctuate in value based on supply and demand. UVXY tracks the SP 500 VIX index by using futures contracts. These contracts decay in value over time, as the market follows an indefinite long term path upwards.
- The ETF is designed for investors who see an upturn in volatility in the coming 30 days. Historically, we have seen investors move to UVXY in times of great uncertainty. Donald Trumps first year inaugurated as the President of the United States, saw a huge swing in volume to UVXY. We may see further investor volume move towards UVXY as the election looms.
- UVXY can potentially offer investors security as a hedge within a portfolio. The negative correlation in price movement to the SP 500 can offset some losses if the market was to crash. Some investors look at inverse ETF’s as an insurance exposure for their higher risk portfolios.
We highly recommend referring to the Pro Shares website which go into further depth regarding the current contracts held alongside more information regarding the overall performance of the ETF. Click here for more information.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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Written by Tyger Fitzpatrick, and Patrick McLoughlin, Founder, and Senior Manager of YIG.