Trading the VIX Futures Roll using Exchange Traded Funds

Abstract

In this paper, we examine the use of exchange-traded funds (ETFs) in the implied volatility market. Because the Volatility Index (VIX) cannot be directly traded and the VIX futures market is accessible only to institutional investors, we develop and analyze how individual investors can employ a VIX-based strategy using ETFs. We test a trading strategy using the ProShares VIXY and SVXY ETFs and compare the performance to a similar strategy using VIX futures and the S&P 500. We select these two ETFs because we can directly compare a long or short trading strategy using VIX futures. While the ETF trading strategies produce excess returns, these returns come with significant downside volatility.