Nov 29, 2023
How UVIX Works: The Basics
Article
SUMMARY
- UVIX is the only 2x leveraged VIX futures ETF.
- UVIX tracks twice the daily performance of the Long VIX Futures Index (Ticker: LONGVOL).
- UVIX may be a useful trading tool.
- Download as a PDF.
On March 30, 2022, Volatility Shares introduced the2x Long VIX Futures ETF(Ticker: UVIX). After a gap of one and a half years, UVIX reintroduced 2xleveraged VIX futures exposure to the U.S. ETF market. This article introduceshow UVIX works, including how it trades, what it tracks, and its potential taxtreatment. UVIX IS A 2X DAILY RESETTING LEVERAGED ETF UVIX differs from existing and previous VIX-linked ETFs in at least two importantways. First, UVIX is 2x leveraged long, compared with competing products thatare either 1x or 1.5x leveraged long. And second, UVIX tracks 2x the LONGVOL This second difference is important because LONGVOL differs from previousindexes by using a 15-minute time-weighted average price (TWAP) of theunderlying VIX futures’ contracts in addition to their settlement to calculate itsend-of-day closing value. The use of the LONGVOL Index aims to make UVIX lesssensitive to the sometimes volatile end-of-day dynamics of the VIX futures LONGVOL is calculated and maintained by the CBOE who posts the daily open/high/low and closing values along with history on their CBOE Index Dashboardhere. Additionally,Yahoo Finance publishes the current value using the ticker (^LONGVOL). Lastly, the Net Asset Value (NAV) for UVIX is published daily on the VolatilityShares' website here. HOW UVIX TRADES UVIX is generally available to trade in tax-advantaged accounts (i.e. IRAs),although your broker/dealer may require you to read and electronically sign adocument that describes the various risks of trading complex products. Pleasealways read the prospectus for the fund before considering trading. Theprospectus for UVIX can be found here. CONTANGO VOLATILITY DRAG LEVERAGE COMPOUNDING UVIX USAGE CASE Furthermore, during strong market downturns, volatility has historically trendedup², and during such a trending period, UVIX may outperform its 2x leveragegoal. The reason for this outperformance is the leveraged compoundingdiscussed above. Dramatic performance during market crashes is a key feature of leveraged longvolatility ETFs, but there are significant cautions and caveats. First, it’s notoriouslydifficult to predict when market crashes will occur. Volatility climbs rapidly whenpanic spreads through markets, but once the fear in equity markets starts to fade,volatility tends to collapse quickly, giving up much of its gains very quickly. Forexample, approximately one week after its March 18, 2020 peak, 2x theLONGVOL Index fell approximately 59%³. A long volatility trader’s timing mustbe good on both entry and exit to be successful. UVIX STRUCTURE AND TAX TREATMENT CONCLUSION
UVIX seeks investment results, before fees and expenses, that correspond totwice the daily percentage moves of the LONGVOL Index*.For example, ifLONGVOL goes up 10% in one day, the goal for UVIX is to go up 20% that day.
Index rather than the legacy S&P 500 VIX Short-Term Futures Index (SPVIXSTR)that VIX ETFs have historically tracked.
market.
UVIX is an ETF which trades like a stock. It can be bought or sold whenever themarket is open, as well as during pre-market and after-market periods. With anaverage bid/ask spread of a penny, and notional average daily volume in themillions, UVIX offers considerable liquidity.
Since their inception, VIX futures with more time until expiry have traded athigher prices than futures nearer to expiry approximately 80% of the time¹. Thisupward sloping term structure is known as contango. Futures in contango canerode returns of funds that roll futures forward.
To position UVIX to deliver 2x the daily performance of LONGVOL, UVIX mustadjust its futures holdings at the end of each trading day – effectively buyingfutures in a rallying market and selling futures in a declining market. The longtermeffect of buying and selling in volatile markets may result in what is calledvolatility drag and may result in losses.
Conversely, leveraged compounding in leveraged ETFs occurs when daily pricesfollow a trending path. For example, if the day-to-day price action is generally inthe same direction, then the rebalancing activity that UVIX performs each daymay compound the ETF’s daily leveraged returns and may cause the ETF tooutperform the 2x daily objective over a longer period.
UVIX has no resemblance to a blue-chip stock that you buy and hold in yourportfolio. However, traders may buy UVIX, or adopt a short-term bullish strategywith its options, in expectation of a market crash. VIX-linked futures and ETFs areperhaps the only investible asset that has historically gone up when the broadermarket goes down.
UVIX is registered under the Securities Act of 1933, and, as such, will reportgains/losses via IRS Schedule K-1 rather than a 1099 for taxable accounts. Whilethis may add some complexity to tax reporting, it also may have some potentialbenefits. For example, gains may qualify for treatment as 1256 contracts, wheregain/loss are split 60% long-term and 40% short-term regardless of how long theshares are held.
UVIX is an ETF intended for sophisticated traders and should not be viewed as a“buy and hold” investment. Traders will need to proactively manage theirpositions as frequently as daily.
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ABOUT THE AUTHOR IMPORTANT INFORMATION ABOUT THE FUND Investors should consider the investment objectives, risks, charges, andexpenses carefully before investing. For a prospectus or summary prospectuswith this and other information about the Fund, please call 866.261.0273 orvisit our website at www.volatilityshares.com. Read the prospectus orsummary prospectus carefully before investing. An investment in the Fundinvolves risk, including possible loss of principal. The material available in thisarticle is not an offer or solicitation of any kind to buy or sell any securities outsideof the United States of America. Shares in the ETF or pool may be purchased and sold on the CBOE BZX. TheFund is a series of the VS Trust (“Trust”), a Delaware statutory trust organized onOctober 24, 2019. The Fund is managed and controlled by the Sponsor, VolatilityShares LLC. The Sponsor is registered as a commodity pool operator (“CPO”) andis a member of the National Futures Association (“NFA”). Investing in VIX futures contracts subjects the Fund to the risks of the VIX futuresand affiliated markets, and this could result in substantial fluctuations in the priceof the Fund’s Shares. The Fund may be highly volatile and generally is intendedfor short-term investment purposes only. Due to the compounding of dailyreturns, the Fund’s returns over a period longer than a single day will likely differin amount and possibly even direction from the VIX or a portfolio of short-termVIX futures contracts over the same period. You could potentially lose the fullprincipal value of your investment within a single day. Unlike mutual funds, theFund generally will not distribute dividends to Shareholders. Investors may choose to use the Fund as a means of investing indirectly in VIXfutures contracts and there are risks involved in such investments and activities. Futures generally are volatile and are not suitable for all investors. The Fund is not a mutual fund or any other type of Investment Company within the meaning of the Investment Company Act of 1940, as amended, and is not subject to regulation thereunder.
Stuart Barton is the CIO of Volatility Shares and a commodity trading specialistwith more than 20 years’ experience building and managing portfolios. Stuartholds a PhD in Economic History from the University of Cambridge, an MBA fromthe University of Surrey, and a B.Sc in engineering from the University of CapeTown. Stuart is also a CFA Charterholder.
Past performance is not necessarily indicative of future results.
Shares of the Fund are not FDIC insured, may lose value, and have no bankguarantee. All supporting documentation will be provided upon request. Foreside Fund Services, LLC is the marketing agent for the Fund. *LONGVOL is an excess return index designed to express the performance of atheoretical portfolio of long positions in first and second month VIX futurescontracts that are rolled daily. The theoretical portfolio consists of the two nearestterm monthly VIX futures contracts that are rolled daily so that the nearestmonth VIX futures contract is rolled to the second nearest month VIX futurescontract in equal daily fractional amounts. This portfolio rolling seeks to maintaina constant weighted average time to maturity of approximately one month.
2Data source: Bloomberg. 3Data source: CBOE.
1Data source: Bloomberg.
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