VIXM ETF: a less volatile way to profit from volatility

By Rob Isbitts

Summary

ProShares VIX Mid-Term Futures Contracts (BATS: VIXM) earns a buy rating from us, primarily due to its ability to play a role in portfolio hedging in bear markets. VIXM tries to take advantage of rising volatility in the S&P 500. This often means that it benefits from declines in the S&P 500, but that is not the case 100% of the time. So, any investor considering using this ETF or other volatility-based ETFs should do their homework. So, let’s try to start the process here.

Strategy

The S&P 500 VIX Index (VIX) is the stock market’s primary benchmark for “volatility” – specifically, how much the market is expected to rise and fall over the next 30 days. Unlike some other VIX-based ETFs which seek to capitalize only on very short-term spikes in volatility, VIXM typically looks to the next 5 months, which provides a smoothing effect on the VIX investment concept.

Exclusive ETF Ratings

• Attack/Defense: Defense

• Segment: Hedged Stocks

• Sub-segment: Volatility

• Correlation (vs. S&P 500): High (negative)

• Expected volatility (vs. S&P 500): very high

Maintenance analysis

VIXM holds futures contracts that expire in each of the next four or five months. For example, at the time of this writing (early November 2022), the ETF had four different maturities: February, March, April and May. Thus, the ETF calls the futures contracts “medium term”. The March and April contracts each account for around a third of total assets, with the remainder split between the shorter (February) and longer (May) contracts.

Strengths

When the stock market panics, volatility increases. When this happens, VIXM aims to be one of the few green elements on an otherwise red screen. And, while short-term VIX-based ETFs act more as trading vehicles or substitutes for holding options on the S&P 500, VIXM’s multi-month “ladder” approach offers some of the action. , but without the immediate sharp decline whenever the S&P 500 price spikes higher and the VIX spikes lower. VIXM’s ETF wrapper also provides a transparent and convenient way to access VIX futures, which many investors will likely find too cumbersome to spend a lot of time and effort on.

Weaknesses

VIXM’s average daily dollar trading volume of around $3 million is rather low. However, as the chart below shows, when the market becomes volatile, volume can spike, making this ETF more liquid. The downside is that VIXM can become popular quickly and then see that popularity fade just as quickly.

Another potential weakness here is that in a sudden market decline like what we saw in early 2020, VIXM’s laddered futures approach may not become a big winner as quickly and with as much force as a shorter-term “long VIX” ETF.

Opportunities

The obvious opportunity with VIXM is the fact that the stock market is currently in a mess. And, as we don’t see any signs that the situation will materially improve any time soon (new all-time highs are over 20% higher from here), there should be enough room left in the bear market to deploy ETFs. VIX for those who identify with and understand their pros and cons.

But there is a more interesting opportunity that may be more timely when it comes to VIXM. Specifically, since it seeks to respond to increasing volatility over the medium term and there are other VIX ETFs that hedge the short term, there may be situations where these can be paired in a portfolio to get the full “volatility ladder” effect.

Threats

And, just as quickly, it makes sense to talk about the threats associated with using VIXM or any other VIX-related ETF. Contrary to what it seems, many investors now believe it’s best not to use the stock market as a casino. VIX is a fickle beast, and ETFs looking to profit from rising market volatility, falling volatility, or both should be handled with “kid gloves” at all times. These vehicles are best used as side dishes in your wallet, not as a main dish. Because the biggest threat from using VIXM and its peers is not the ETF itself, but trader error: investors who attempt to overplay their hand and use them as purely speculative tools.

Exclusive technical evaluations

• Short term rating (next 3 months): Buy

• Long-term rating (next 12 months): Sell

conclusion

ETF Quality Opinion

As someone who has been investing professionally for three decades, but has never traded futures or shorted stocks, bear market ETFs like VIXM have been a great tool at my disposal over the years. . The question of liquidity could be a thorn in the side of professional investors. However, with any ETF, there are risks to consider when determining if, when and how to use one in a portfolio.

ETF Investment Notice

We rate VIXM as a buy for the reasons stated above. However, our exclusive VIXM technical ratings, featured above, are perhaps a better way to sum up our opinion of this quirky, overlooked, but potentially powerful ETF. Bear markets generally don’t end until volatility has reached a level well above what we have seen in this cycle. This graphic shows the 2020 version.

For this reason alone, VIXM is on our radar as long as a bear market is in place. But the VIX doesn’t stay high forever, and we suspect that at some point in the next 12 months the storm will have passed, at least for a while. This makes VIXM a more opportunistic tool than something we would expect to beat the table on year after year.