For investors looking for ways to potentially trade a rise in market volatility ahead of the midterm elections, products tied to VIX futures can provide one possible strategy. These include the ProShares Ultra VIX Short-Term Futures ETF (UVXY), iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), and ProShares VIX Short-Term Futures ETF (VIXY).
Historical data shows why election-related volatility can attract investors’ attention:
- Ahead of the 1990 midterm elections, the VIX jumped from 16 to 36.
- Ahead of the 1994 midterm elections, the VIX jumped from 11 to 18.
- Ahead of the 1998 midterm elections, the VIX jumped from 16 to 45.
- Ahead of the 2006 and 2010 midterm elections, the VIX fell.
- Ahead of the 2014 midterm elections, the VIX jumped from 12 to 40.
- Ahead of the 2018 midterm elections, the VIX jumped from 12 to 37.
- Ahead of the 2022 midterm elections, the VIX jumped from about 22 to 34.
Nowadays, we can see it happen again. To trade a potential move higher, investors can always bet on volatility using:
UVXY Can Magnify a Volatility Surge
UVXY is an exchange-traded fund (ETF) from ProShares that gives investors exposure to short-term market volatility. The fund is connected to the VIX, which is often called the stock market’s “fear gauge.” When investors become worried about the market, the VIX often rises. When investors are more comfortable, the VIX often falls. However, UVXY does not directly track the VIX. Instead, it tracks VIX futures, which are contracts based on where investors expect volatility to be in the future. UVXY can be very volatile for two main reasons.
First, it uses 1.5× leverage. This increases the size of its daily moves compared with the underlying index. Second, UVXY is based on VIX futures. The value of those futures can change quickly when investors’ expectations about the stock market change. This means UVXY can rise sharply when markets become nervous. But it can also lose value when markets calm down.
VXX: Exposure to the Market’s Fear Trade
VXX is an exchange-traded product designed to give investors exposure to short-term market volatility. VXX is also connected to the VIX, which is often called the stock market’s “fear gauge.” When investors become nervous about the market, the VIX often rises. When markets are calmer, the VIX often falls. However, there is an important thing to understand about VXX: it does not directly track the VIX.
Instead, VXX is designed to track an index made up of VIX futures contracts. VXX tracks the S&P 500 VIX Short-Term Futures Index. This index uses VIX futures contracts that are generally focused on the short-term outlook for market volatility. The index regularly moves from futures contracts that are getting closer to expiration into contracts with later expiration dates.
VIXY Keeps the Volatility Trade Simple
The VIXY is an exchange-traded fund (ETF) from ProShares that gives investors exposure to short-term market volatility. It is designed to follow the performance of the S&P 500 VIX Short-Term Futures Index and provides 1× exposure to that index. That may sound complicated, but the basic idea is fairly simple: VIXY is designed to track short-term futures contracts tied to the VIX, an index often called the market’s “fear gauge.”
The VIX measures expected volatility in the S&P 500. When investors become nervous about the stock market, the VIX often rises. When markets are calm, the VIX often falls.
The Big Question: Will Volatility Actually Rise?
With the midterm elections approaching, volatility could become an interesting area for investors to watch. History shows that the VIX has made some pretty big moves around past elections, although there have also been years when volatility moved lower.
That is what makes a potential election-volatility trade interesting but also risky. There is no guarantee that the VIX will rise simply because an election is approaching. For investors who do expect volatility to pick up, UVXY, VXX and VIXY offer different ways to potentially take advantage of that move.
