ProShares Ultra VIX Short-Term Futures (BATS:UVXY) is a listed ETF which provides investors leveraged exposure to the SP 500 VIX short term futures index.
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.
The UVXY ETF has recently peaked investor interest as the fund returned 10.24% in Wednesday’s trading session. With more investors intrigued in UVXY, we will breakdown what you need to know about the fund.
How does the ProShares Ultra VIX Short-Term Futures (UVXY) ETF work?
Firstly when analysing volatility, investors would preferably like to mirror the CBOE Volatility Index VIX, which is the cornerstone in indicating market volatility.
However, there are no securities that provide identical tracking performance to CBOE. Hence, investors and funds use SP 500 VIX short term futures, to capitalise on volatility.
The Proshares UVXY ETF is designed for knowledgable investors who look to profit from increases in the expected volatility of the S&P 500.
This is measured by the prices of VIX futures contracts. UVXY is designed for short term use and investors are cautioned to actively manage their investment daily.
Now, the UVXY ETF is made up of two VIX futures contracts that are nearest to expiration. As each day goes by, the UVXY fund manager needs to buy and sell futures to maintain a 1.5X leverage of the S&P 500 VIX Short-Term Futures Index.
In a period of Contango, the longer term futures prices rise and the fund manager is forced to pay more each day for VIX futures contracts. See how Contango for VIX futures works works here.
The Contango acts as a headwind and eventually causes the long term decays of the funds Net Asset Value and price. This explains why the long term performance of this ETF is -86% over the past 12 months.
Why is the UVXY ETF up 10.4%?
Over the past 5 days of trading, the Chicago Board Options Exchange’s Volatility Index (INDEXCBOE:VIX) has gained 33%. The CBOE VIX is a popular measure of the stock market’s expectation of volatility based on S&P 500 index options.
In simple terms, UVXY generates a 30-day forward projection of volatility and is driven by the demand in put or call option contracts.
The 33% gain in the VIX indicates investors are expecting higher volatility over the next 30 days. Why is this? The market in the past week has experienced slight pull back due to an extended bull period and the concerns surrounding the Delta strain.
With this change in expected volatility over the next month, UVXY has gained 9.11% over the past 5 days of trading.
So why didn’t UVXY gain 33%? As discussed earlier, the CBOE cannot be tracked with financial instruments or derivates. Instead the UVXY ETF aims to track the S&P 500 VIX Short-Term Futures Index which has only gained 9.47% over the past week.
As we compare, we can see UVXY and the S&P 500 VIX short term Futures Index returns are almost identical. Therefore, UVXY investors should focus on the performance of the S&P 500 VIX Short-Term Futures Index in realising returns.
The Bottom Line – UXVY ETF
In summary, the increase in the UXVY ETF is due to increased projected market volatility. The cause is due to both an extended bull period alongside concerns surrounding the economic impacts of the Delta strain in the United States.
We will see over the coming weeks if the market can bounce back. The sentiment of Wallstreet may be bruised as a result of the current market climate.
Written by Tyger Fitzpatrick
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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