What is VIXM? (Pros, Cons, and Strategies)
If you're concerned about market volatility and looking for ways to hedge your portfolio, VIXM might be worth considering. VIXM, or the ProShares VIX Mid-Term Futures ETF, is designed to offer exposure to the S&P 500 VIX Mid-Term Futures Index. Today, we’ll delve into what VIXM is, along with its advantages, disadvantages, and investment strategies.
What is VIXM?
VIXM is an exchange-traded fund (ETF) that allows investors to gain exposure to volatility through the VIX futures market. Specifically, VIXM targets the performance of the VIX futures contracts with a weighted average of five months.
The primary underlying asset of VIXM is the futures contracts on the CBOE Volatility Index (VIX), which is often referred to as the "fear gauge" of the market. The VIX itself measures the market's expectations of 30-day forward-looking volatility, and VIX futures allow investors to trade this volatility.
Key Features of VIXM
- Exposure to mid-term VIX futures contracts
- Approximately five-month weighted average of VIX futures duration
- Tracks the S&P 500 VIX Mid-Term Futures Index
VIXM aims to roll into longer-dated VIX futures contracts, primarily focusing on 4th to 7th month contracts, thus mitigating some of the decay seen in short-term VIX futures ETFs.
VIXM Composition
VIXM primarily comprises mid-term VIX futures contracts. Unlike direct investments in equities or corporate bonds, VIXM's performance is derived from the futures contracts, and its value fluctuates based on changes in expected market volatility. It doesn’t invest in actual stocks or bonds but in derivatives that reflect volatility expectations.
Pros of VIXM
Hedge Against Market Volatility
VIXM can serve as an effective hedge against market downturns. When equity markets decline, volatility often spikes, which typically results in higher VIX futures and consequently higher VIXM prices. For instance, during sudden market corrections, VIXM can provide positive returns counteracting the losses in the equity portfolio.
Longer Duration Mitigates Roll Yield
VIXM focuses on mid-term futures contracts, which helps reduce the negative impact of the roll yield compared to short-term VIX futures products. Roll yield is the loss that occurs when futures contracts need to be rolled over from one month to the next at a higher price, which can be more pronounced in short-term products like VXX.
Diversification
Including VIXM in a portfolio can offer diversification advantages. Traditional asset correlations may break down during periods of high stress, but VIXM typically moves inversely to the broader stock market, providing a buffer against such periods.
Cons of VIXM
Complexity and Risk
VIXM is a complex product suitable for sophisticated investors. The mechanics of VIX futures and roll yield can be difficult to grasp fully, and without a proper understanding, investors may find themselves in a precarious position.
High Expense Ratio
VIXM has a relatively high expense ratio compared to many other ETFs. This higher fee can eat into your returns, especially in periods of low volatility when VIX futures might not perform well.
Negative Carry
VIX futures generally have a negative carry, meaning the cost to maintain a long position in VIX futures can be quite high. As a result, you may lose money if market volatility does not increase as anticipated.
VIXM Investment Strategies
Given its unique properties, VIXM is not suitable for all types of investors. It's primarily geared towards those who have a thorough understanding of volatility products and are looking for a strategic hedge or a speculative play on increased volatility.
Hedge Strategy
One of the most effective ways to use VIXM is as a hedge against market downturns. During periods of low volatility, the cost of holding VIXM can be relatively high due to negative carry. However, the inverse relationship between VIXM and the stock market becomes invaluable during market sell-offs.
Tactical Allocation
Investors might also consider using VIXM as part of a tactical allocation. Allocating a small percentage of your portfolio to VIXM during periods of anticipated market stress might provide substantial downside protection.
Short-term Speculative Play
For those who are more speculative in nature, VIXM offers a way to bet on rising volatility. However, this strategy comes with higher risks and should be approached with caution, keeping a close eye on market conditions and volatility expectations.
Conclusion
VIXM offers a unique opportunity for investors to gain exposure to market volatility through mid-term VIX futures. While it provides effective hedging capabilities and potential diversification benefits, it is also laden with complexity and risks that require thorough understanding.
Whether you consider VIXM for hedging, tactical allocation, or speculation, ensure that you fully comprehend its mechanics and align it with your investment time horizon and risk tolerance.