While doing some research around capital markets, the following saying caught our eye, ‘the only constant in the market is changing. In another way, volatility is always accompanying investors.

In fact, the Horizons BetaPro S&P 500 Vix Short-Term Futures ETF (HUV) led the top-performing ETFs in Canada over the last couple of weeks in April. It managed to return 10.98% and 12.54% for the third week (between the 18th and 22nd) and the fourth week (between the 25th and 29th) respectively. This comes as a reflection of surging investor uncertainty attributed to several factors. For instance, investors are still trying to make sense of tightening monetary policy by Central Banks to combat red-hot inflation. Also, the ongoing Russian-Ukrainian war is still inducing fear and precariousness in the market.

If you are wondering where the market is heading over the next month and looking for a quantitative measure for volatility, then you should look at the VIX.

So What Is The VIX? 

VIX is short for the Chicago Board Options Exchange Volatility Index which is also known as the fear gauge. It is a real-time volatility index created in 1993 to quantify the market expectation of volatility over the next 30 days. Said differently, the VIX measures implied or expected volatility instead of historical and actual volatility.

How is the VIX calculated?

VIX is calculated on a spot basis where calculations involve using the S&P500 options prices by combining the weighted prices of the call and put options for the next 30 days. Options must expire between 23 and 37 days to be included in the index.

What does the VIX teach us?

Even though the VIX measures the expected price movement in the S&P500, it is employed as a proxy for the broader market volatility. Historically, when the VIX traded at a level of 30 or above, then the market was deemed in a high volatility period. Conversely, if it was trading below 20, then this indicated that the market was in a period of stability.

Realizing the negative correlation between broader market performance and volatility, a spike in the VIX level resonated with elevated fear sentiment and heightened volatility. This corresponds to large price swings in both directions, either upward or downward. Inherently, this is a reflection of a high-risk, high reward investing environment. Skilled investors can cash in enormous profits while any mishap can trigger large scale losses.

The opposite is true as well, when the VIX is low, there is lower fear, and consequently smaller price swings, reflecting a more predictable and stable investing environment.

How to Get Exposure to the VIX?

Like any other index, investors cannot invest directly in the VIX. They instead need to search for alternative ways of gaining exposure to the VIX, such as futures contracts, options, exchange traded notes, and ETFs. Most of these financial instruments, if not all of them, do not expose investors to volatility on a spot basis. They represent a collection of VIX futures and an approximation of the index performance

The NEO ETF Screener identifies the Horizons BetaPro S&P 500 Vix Short-Term Futures ETF (HUV) as the single Canadian ETF tracking the VIX index.

The Horizons BetaPro S&P 500 Vix Short-Term Futures ETF (HUV)  

HUV is a passively managed ETF that was released to the market on December 15th, 2010. It seeks to track the performance of the S&P 500 VIX Short-Term Futures Index for a single day. The index utilizes the prices of the next two near-term VIX futures contracts. This is to replicate a position that rolls the nearest month's VIX futures to the next month on a daily basis in equal fractional amounts. This results in a constant one-month rolling long position in first and second-month VIX futures contracts. The index is highly volatile and tends to return to its historical mean. This is to say that its performance is expected to be negative over the long run.

As of May 3rd, this ETF equally distributes its assets. It holds 50% in the S&P 500 VIX Short-term Futures May 2022 with the other 50% in the S&P 500 VIX Short-term Futures June 2022. HUV charges an expense ratio of 1% while trading in United States Dollars on the Toronto Stock Exchange.

Bottom Line and Final Considerations

Investors who are looking to invest in ETFs tracking the VIX should be aware that these financial instruments are meant for short term time horizons. They do not reflect the spot performance of the VIX index and should be expected to perform slightly differently. Investors should also be closely watching their investments and look out for any adverse movements in the market. Remember, the VIX only reflects market sentiment, so it is better used as a guide rather than the final word.