Volatility is an essential but dangerous component of investment. On the one hand, the capacity for the price of a security to swing back and forth around a mean provides investors with opportunities to profit using strategic buys or sells of that security. Taken slightly differently, assets that investors broadly consider "volatile" tend to attract investors more willing to take on risk; in this sense, volatility is an important way for an investor to evaluate the suitability of a particular asset given her risk tolerance.
However, volatility is also notoriously complex and difficult to assess. An investor able to consistently and accurately understand the implications of volatility might have tremendous advantages compared to rivals, but of course, this is too good to be true. So, how can volatility work for a retail investor in a way that minimizes risk?
Investors often turn to the Chicago Board Options Exchange's CBOE Volatility Index (VIX) to measure volatility—the VIX uses the price of S&P 500 options to assess the next 30 days of implied volatility of the S&P 500. Because options prices tend to rise when investors become concerned about something in the market, the VIX often rises around when the S&P 500—and, in most cases, the broader market—falls, and vice versa. Because of this tendency, investors often refer to the VIX as the Fear Index.
Investing in the VIX using an exchange-traded fund (ETF) is a popular way of capitalizing on changes in broad investor fear and concern about the market. Heading into 2025, there are indeed many reasons investors might have concerns about the welfare of the market, from domestic and international political issues to ongoing global conflict and much more. Below are three volatility exchange-traded products playing off of the VIX that sophisticated investors with a solid understanding of volatility might wish to consider for this moment.
iPath Series B S&P 500 VIX Short-Term Futures ETN
One of the primary means investors have of accessing the VIX is the iPath Series B S&P 500 VIX Short-Term Futures (NYSE:VXX), an exchange-traded note for first and second-month VIX futures. VXX has a daily rolling long position, meaning it is not suitable for buy-and-hold trading. Its focus on short-term VIX futures correlates it to the index, but it still is likely to deviate from an investment in the VIX directly (although the latter is not possible for investors, only hypothetical).
What this means for investors is that VXX can be a powerful tool to capitalize on short-term bursts of anxiety among investors—when anxiety increases and stocks go down, the VIX (and VXX, by extension) should rise.
Simplify Volatility Premium ETF
While VXX takes a daily long position on the VIX, the Simplify Volatility Premium ETF (NYSE:SVOL) adopts a short position, meaning that it rises along with the market when the VIX falls. SVOL was conceived as a means of generating income in a low-yield setting, and it aims to achieve -0.2x to -0.3x exposure to VIX short-term futures.
SVOL is also best suited as a short-term play and can be a good way for investors to take advantage of easing investor anxiety in localized moments of market upswing. Its small inverse leverage ratio aims to mitigate extreme swings in volatility in the VIX. Though SVOL remains a complex investment for savvy volatility-focused investors, these measures help to minimize risk where possible.
ProShares Ultra VIX Short-Term Futures ETF
On the other end of the spectrum from SVOL is the ProShares Ultra VIX Short-Term Futures ETF (NYSE:UVXY) because of its leveraged exposure to short-term VIX futures. Notably, a leveraged VIX ETF like this one offers another layer of amplification of the market's swings more broadly—it is common for the VIX to move farther than the S&P 500 already when there is price movement in the latter.
That's all to say that, like both products above, UVXY is especially ill-equipped for buy-and-hold trading. It is a powerful tactical tool to benefit significantly from brief spikes in investor anxiety accompanying—or sometimes preceding—drops in the S&P 500.
With all of the potential for shifts to the market in 2025, investors may be wise to consider how to safely and effectively make a play on changes to investor anxiety. Volatility funds and products like these can offer exceptional returns to careful and knowledgeable investors.