Quick Take: Investors learning how to hedge a portfolio against volatility with VIX ETFs can use volatility-linked funds as a tactical hedge during periods of market stress. When elevated valuations, inflation concerns, or Federal Reserve policy trigger stock market pullbacks, funds like the ProShares Ultra VIX Short-Term Futures ETF (UVXY), iPath S&P 500 VIX Short-Term Futures ETN (VXX), and ProShares VIX Short-Term Futures ETF (VIXY) offer exposure to short-term VIX futures.
Understanding Market Volatility and Over-Extended Valuations
Markets have become wildly volatile.
But that’s to be expected when markets become as over-extended as they’ve become. Plus, we have to remember that inflation is still damaging, and that the Federal Reserve may only cut interest rates another two times in the new year.
The Jeremy Siegel Warning: Dot-Com Bubble Parallels and Correction Risk
In addition, according to Jeremy Siegel, professor emeritus of finance at University of Pennsylvania’s Wharton School of Business, as quoted by CNBC, “I think the probability of a correction next year, which is defined as a 10% drop in the S&P, is getting higher. ... the major forces to propel things upward I think have already been built in.”
“Siegel pointed out that this would mark the second time in history that the S&P 500 rallied more than 20% in two straight years. The first time was 1998 and 1999, followed by a dotcom bubble burst in 2000, he said.”
But don’t let that scare you away from the markets. Instead, use the volatility to your advantage, as we also noted just days ago.
We can do that by simply trading volatility with ETFs such as:
3 Targeted Volatility ETFs and ETNs to Protect Your Portfolio
1. ProShares Ultra VIX Short-Term Futures ETF (NYSE: UVXY) — 2x Leveraged Spikes
ProShares Ultra VIX Short-Term Futures ETF (SYM: UVXY) -- The ETF was designed to match two times (2x) the daily performance of the S&P 500 VIX Short-Term Futures Index. When the VIX pops, the UVXY typically follows.
2. iPath S&P 500 VIX Short-Term Futures ETN (BATS: VXX) — Direct Futures Exposure
iPath S&P 500 VIX Short-Term Futures (SYM: VXX) -- The VXX ETN provides exposure to the S&P 500 VIX Short-Term Futures Index.
3. ProShares VIX Short-Term Futures ETF (NYSE: VIXY) — 1x Benchmark Volatility
ProShares VIX Short-Term Futures ETF (SYM: VIXY) -- ProShares VIX Short-Term Futures ETF provides long exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.
The Golden Rule of Volatility Trading: Managing Contango and Rollover Decay
While VIX ETFs serve as temporary tactical hedges, long-term wealth preservation relies on owning durable economic moat stocks that compound safely through market cycles.
Investors hedging equity positions while maintaining passive income can use Portfolio Payouts to map out recurring distribution schedules.
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Title: How to Value a Company Like a Pro Investor (or Hidden Gems: 3 Stocks Wall Street Is Ignoring)
Embed URL: https://www.youtube.com/@behindthemarkets
Caption: Watch Dylan Jovine explain how institutional traders manage risk, position sizing, and volatility hedges during uncertain market environments.
Frequently Asked Questions About VIX ETF Hedging
Q1: Can you hold VIX ETFs like UVXY or VIXY as long-term investments?
A: No. VIX ETFs hold short-term VIX futures contracts, which are affected by a structural cost called "contango," where futures contracts trade at higher prices than the current spot price. Over time, rolling these contracts can erode the fund's value, making VIX ETFs more suitable for short-term tactical trades. To understand how to hedge a portfolio against volatility with VIX ETFs, investors should consider this ongoing cost.
Q2: What is the difference between UVXY and VIXY?
A: VIXY is a 1x leveraged ETF designed to track the daily performance of short-term VIX futures, while UVXY is a 2x leveraged ETF designed to amplify daily volatility movements by 200%. UVXY offers higher profit potential during panics but carries steeper decay risk.
Q3: What did Wharton Professor Jeremy Siegel warn about market corrections?
A: Professor Jeremy Siegel pointed out that back-to-back 20%+ annual gains in the S&P 500 have only occurred twice in modern history (1998–1999 and recently), warning that over-extended valuations historically increase the probability of a 10%+ market correction.
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Written by Ian Cooper