Proshares Ultra VIX Short Term Futures ETF: Analysis and How to Invest


Listed on the U.S. exchange since 2011, the Proshares Ultra VIX Short Term Futures (UVXY) ETF provides a 1.5x leveraged synthetic replication of the S&P 500 VIX Short-Term Futures index, composed of a portfolio of VIX futures contracts. It allows you to invest on daily performance by capturing fund volatility. Intraday is the key term for this ETF because it is not designed for long-term trades. Because of the way they are structured, these instruments perform better during market uncertainty, particularly during downturns. So let’s see what this is all about, how to invest and what the possible risks are. 

Proshares Ultra VIX Short Term Futures ETF: What it is and How it works

An ETF (Exchange Traded Fund) is a financial product that reproduces the performance of a basket of securities operating on the underlying benchmark. In this case we have a singular form of ETF because it is based on an equally particular index: the VIX of S&P 500, where VIX stands for Volatility Index.

It is a very useful tool for investors because it allows you to measure your expectations for the market over the next 30 days. To do so, it uses the prices of call & put assets on the S&P 500 and takes into account the implied volatility. Normally, in order to analyze the fluctuations of a security, we refer to its history, while in this case we look at what will happen in the near future.

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To understand how it works, let’s take for example a negative day on Wall Street: the S&P 500 index loses points, so in this case its VIX will rise because a downward correction of prices is expected. Consequently the UVXY will also rise, which replicates its trend, but by 1.5 times. Conversely, in a time of confidence about price stability, the VIX will hold low and the UVXY will not be cheap. 

Composition

We mentioned that the Proshares Ultra VIX Short Term Futures ETF exposes to the S&P 500 VIX index. The latter, created by Standard&Poor’s in 1957, includes 500 of the largest stocks in the U.S. market, whose shares are listed on the NYSE, AMEX and NASDAQ. It has now surpassed the Dow Jones in prominence and shows us a fairly realistic snapshot of the health of the American economy.

Among the companies that make up the S&P 500 we have: Microsoft, JPMorgan Chase, Visa, Alphabet (Google), Facebook, Johnson & Johnson, to understand its remarkable scope. That’s why when its VIX Short-Term Futures go up, it generates major fears in the markets and the UVXY ETF becomes crucial.

Quotation and Technical Analysis

There are charts that analyze the history of the VIX, however since the Proshares Ultra VIX Short Term Futures ETF is based on daily reports and future outlooks, these are more useful in analyzing its patterns than the quotes per se.

The reason why it is not advisable to buy an ETF on a VIX and hold it until it rises is that in the long run it creates the contango effect, which occurs when the price of futures expiring on a certain date is higher than the spot price expected for that day, considering the spot price as the current price at which the security is traded on the market. That is why this instrument is much more suitable for a speculative trader than for long-term investors.

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How to Invest: Solutions and Platforms

To invest in ETFs, it is ideal to sign up with an online broker platform. There are several on the net, among which one of the most accredited is eToro, which offers free registration and a minimum deposit of $50 to start investing. Commissions are also very convenient and in many cases are zero, and it is possible to trade on a variety of assets and financial products. To practice with UVXY, a demo account is available: in this way you will use a virtual $100,000 ceiling, without risking your capital, for those who need to better understand the trading mechanisms. 

A Curiosity about the S&P 500 VIX Short-Term Futures Index

Since the growth of market volatility is synonymous with negative investor sentiment, this index is also nicknamed the “fear index” which, however, becomes attractive to speculators who use instruments such as UVXY, since their gains depend on how much uncertainty there is in the future. 

Benefits and Risks of Investment: Is it worth it?

The Proshares Ultra VIX Short Term Futures ETF is a completely speculative option that must be closed within the day. If the negative trend of the S&P 500 index is sensed, it becomes an instrument that can provide gains. However, it is not indicated for those who are not used to investing in the short term and is not suitable for long term investments. Therefore, a certain ability and risk appetite is required, because dealing with volatility forecasts, the 1.5x leverage, as well as being profitable, can also cause big losses, if one’s intuition should be wrong.

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