Vxx Vs Vix: Understanding The Differences

Introduction

If you’re an investor or trader, you’ve probably come across the terms VXX and VIX before. These two terms refer to volatility-based exchange-traded products (ETPs) that are designed to provide exposure to the stock market’s fear gauge, the CBOE Volatility Index (VIX).

While VXX and VIX may sound similar, they are actually quite different. In this article, we’ll explore the differences between VXX and VIX, and help you understand which might be the better choice for your portfolio.

What is VXX?

VXX is an ETP that tracks the S&P 500 VIX Short-Term Futures Index. This index consists of futures contracts on the VIX with an average maturity of one month. VXX is designed to provide investors with exposure to the VIX, allowing them to profit from increases in market volatility.

However, VXX is not a direct investment in the VIX itself. Instead, it invests in futures contracts on the VIX, which can lead to tracking errors and other issues. Additionally, because VXX invests in short-term futures contracts, it is subject to the effects of contango, which can cause the fund to underperform in certain market conditions.

What is VIX?

VIX, on the other hand, is the CBOE Volatility Index, which measures the market’s expectation of 30-day volatility. It is often referred to as the “fear gauge” because it tends to rise when the stock market is experiencing heightened levels of uncertainty or stress.

VIX is not investable directly, but rather through VIX futures contracts, which are traded on the CBOE Futures Exchange. VIX futures contracts have different expirations, ranging from one month to several years.

Key Differences Between VXX and VIX

Now that we understand what VXX and VIX are, let’s take a closer look at some key differences between the two:

1. Investment Structure

VXX is an ETP that invests in VIX futures contracts, while VIX is an index that tracks the market’s expectation of 30-day volatility.

2. Exposure

VXX provides exposure to the VIX through futures contracts, while VIX provides exposure to the market’s fear gauge directly.

3. Tracking Error

Because VXX invests in futures contracts on the VIX, it can experience tracking errors and other issues that can cause it to deviate from the actual performance of the VIX. VIX, on the other hand, is an index that tracks the market’s expectation of 30-day volatility, so there is no tracking error.

4. Contango

VXX is subject to the effects of contango, which can cause it to underperform in certain market conditions. VIX futures contracts are also subject to contango, but because VIX is an index, it is not affected by contango.

Which Should You Choose?

So, which is the better choice for your portfolio – VXX or VIX? The answer depends on your investment objectives and risk tolerance.

If you are looking for direct exposure to the VIX and have a high risk tolerance, investing in VIX futures contracts may be a good option. However, if you are looking for a more diversified investment that provides exposure to the VIX through futures contracts, VXX may be a better choice.

Ultimately, the decision of whether to invest in VXX or VIX should be based on your investment goals and risk tolerance. It’s important to do your research and consult with a financial advisor before making any investment decisions.

Conclusion

VXX and VIX are both volatility-based ETPs that provide exposure to the stock market’s fear gauge, the VIX. However, they differ in their investment structure, exposure, tracking error, and susceptibility to contango. Understanding the differences between VXX and VIX is important when making investment decisions, and consulting with a financial advisor is always recommended.

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