How to Use a VIX ETF to Protect Your Portfolio
When the uncertainty increases in the market the volatility will follow closely in its footsteps.
Want to learn about market volatility and the VIX, click here >
Many investors and new traders are not aware that an increase in volatility is actually a massive opportunity to make quick money in the stock market.
Did you know that an increase in volatility can make you a lot of money in your regular brokerage account?
Let’s take a look at using a VIX ETF in your trading strategy to protect your portfolio.
What is a VIX ETF?
Volatility contracts are traded via futures, which require additional paper work and administration to open.
Institutional companies have made it super easy for retail traders to bet on volatility using the VIX ETF.
Money managers will purchase these volatility futures and bundle them into one massive portfolio.
They will then sell partial units of ownership to the retail investor, making it very easy to transact.
It is literally that easy. The VIX ETF can be bought like normal stock shares in any other company.
Here is a list of all the different VIX ETF products available, quoted as of publishing date:
Symbol |
ETF Name |
Total Assets* |
YTD |
Avg Volume |
| VXX | iPath S&P 500 VIX Short-Term Futures ETN | $597,618.40 | 44.84% | 49,811,936.00 |
| VXXB | iPath Series B S&P 500 VIX Short-Term Futures ETN | $160,534.76 | N/A | N/A |
| VIXY | ProShares VIX Short-Term Futures ETF | $98,019.29 | 44.41% | 3,090,935.00 |
| VXZ | iPath S&P 500 VIX Mid-Term Futures ETN | $22,359.59 | 18.34% | 340,889.00 |
| VIXM | ProShares VIX Mid-Term Futures ETF | $21,482.30 | 18.35% | 60,106.00 |
| XVZ | iPath S&P 500 Dynamic VIX ETN | $14,070.21 | -14.43% | 5,293.00 |
| VXZB | iPath Series B S&P 500® VIX Mid-Term Futures ETN | $12,776.98 | N/A | N/A |
| VIIX | VelocityShares Daily Long VIX Short-Term ETN | $7,901.44 | 44.82% | 226,862.00 |
| EVIX | VelocityShares 1X Long VSTOXX Futures ETN | $4,765.96 | N/A | N/A |
| BSWN | VelocityShares VIX Tail Risk ETN | $4,564.36 | -38.30% | 22,327.00 |
| LSVX | VelocityShares VIX Variable Long/Short ETN | $4,448.67 | -51.01% | 9,436.00 |
| VMAX | REX VolMAXX Long VIX Weekly Futures Strategy ETF | $3,150.83 | 82.03% | 15,706.00 |
| VIIZ | VelocityShares Daily Long VIX Medium-Term ETN | $847.53 | 18.65% | 12,577.00 |
What is the Difference Between a VIX ETF and VIX ETN?
The difference between an ETF and ETN is the structure of the product.
ETNs stand for Exchange Traded Notes, while ETFs stand for Exchange Traded Funds.
When buying an ETF product, you are gaining actual exposure into the underlying security.
So if you buy a gold ETF, this means the portfolio actually owns physical gold.
ETNs are unsecured and more speculative because they can have only paper assets.
When to Buy a VIX ETF to Protect Your Portfolio?
Now that you know what a VIX ETF is, and which ones are the most active by volume it’s time to talk about when to use them.
Simply put, if you are every concerned there will be a crash or an increase in uncertainty you can buy a VIX ETF.
Based on stock market seasonality patterns, mid-August to October is a risky time to own stocks.
This is a time you want to own a VIX ETF for protection.
If your portfolio drops 5%, but your VIX ETF makes you 5% – you essentially eliminated the risk of holding your long position despite market volatility.
Read here to find out more about stock market seasonality and when to protect yourself >
Here is an example of how a VIX ETF moves in comparison to the SP500 broad stock market index:
- Top chart is the SP500 stock market index
- Bottom line chart (red) is the “VXX ETF”
- Notice they are inversely correlated
- Once market bottoms out you have to take profit! (more in next section)
VIX ETF vs SP500 Correlation
When to Sell the VIX ETF and Lock Profit
Remember the reason you are buying a VIX ETF to begin with, to protect your portfolio during volatility.
As soon as the volatility subsides and markets stabilize you should close the VIX ETF long position and take the profit.
These ETFs and ETNs function like pressure relief valves, it takes constantly increasing pressure to keep gaining.
The momentum volatility pauses even a brief moment, these VIX ETF products will plummet very quickly as the stock market rebounds.
So do not fall in love with them, rather buy them for protection and flip them for profit quickly.
The goal is to offset your stock market losses with the long VIX ETF trade, then take the profit and make the losses back on your stock portfolio.
At the end of the day it is important to monitor the markets constantly and conduct careful technical analysis.
Timing is everything on this trade.
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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.
