The ProShares Ultra VIX Short-Term Futures ETF (AMEX:UVXY) is a popular way to play swings in implied volatility shifts on the S&P 500. This leveraged ETF is designed to gain exposure to the volatility of S&P 500 options, but the construct of this ETF is not favorable for all investors. In this article, we will explore why investing in UVXY can be risky, and why it could make sense for some investors.
UVXY is a leveraged ETF, meaning it provides exposure to the S&P 500 options that is amplified by a factor of 1.5x. This means that investors will receive a much larger return on their investment than they would in an unleveraged ETF, but it also means they will be taking on more risk. The downside of leveraged ETFs is that they can have a negative compounding return if volatility remains stable or decreases, resulting in losses.
volatility is one of the key risk associated with investing in UVXY. volatility tends to “stick”, meaning that if volatility is high now, it will likely be high in the future. This can be beneficial for investors in UVXY, as they will receive a higher return on their investment. However, it also means that the risk of losses is higher.
Another risk associated with UVXY is that it is a long-term investing strategy. This means that investors should not expect to see immediate returns from their investment and should be prepared to hold the ETF for an extended period of time in order to reap the rewards. Additionally, investors should be aware that the returns of UVXY can be unpredictable, as they will be dependent on the volatility of the S&P 500.
Despite the risk associated with investing in UVXY, there are some potential benefits. For those investors who are looking to gain exposure to the S&P 500 options, but are uncomfortable with the risk of an unlevered ETF, UVXY could provide a viable option. Additionally, the leverage factor of 1.5x could mean that investors receive a larger return on their investment than they would with an unlevered ETF.
In addition to the potential benefits of investing in UVXY, there are also some practical considerations that investors should take into account. For example, investors should be aware that the ETF is traded on the BATS exchange and carries a 0.95% expense ratio. Additionally, it is important to keep in mind that the ETF is not suitable for all investors and should not be viewed as a long-term investment strategy.
Ultimately, investing in UVXY carries risk and rewards. Those investors who are looking to gain exposure to the S&P 500 options, but are uncomfortable with the risk of an unlevered ETF, may find UVXY to be a viable option. However, investors should be aware of the risk associated with the ETF and should be prepared to hold it for an extended period of time in order to reap the rewards.
