Wall Street traders have invested over $1 billion this year in funds linked to the VIX index. Money is flowing en masse into exchange-traded products that track volatility index futures Cboe as investors prepare for turbulence in the stock market after a record rally.
The largest of these instruments — Barclays iPath S&P 500 VIX Short-Term Futures ETN — has gained more than 300% since the start of 2025. The logic is simple: if the stock market crashes, volatility will spike, and these funds will profit.
But so far, that hasn’t happened, and investors are incurring significant costs that “eat up” returns. These are built into the very structure of the funds. Bloomberg Intelligence senior ETF analyst Eric Balchunas compared them to a chainsaw: a very effective tool for certain tasks, but one that can easily turn against its owner.
This refers to the mechanics of losses that arise when expected future swings are higher than current ones. Here, timing accuracy is everything. Those who bought the Volatility Shares 2x Long VIX Futures ETF on April 1 and sold a week later after the announcement of new US tariffs tripled their investment.
But holding this fund for a year would have been a disaster: the loss would have been 78%. Despite the risks, money flows aren’t stopping. VXX fell by 32%, but still manages $1 billion and showed a net inflow of 312%. UVIX dropped by 78%, but with $510 million in assets, received a 215% inflow.
UVXY is down 57%, assets — $690 million, inflow 150%. VIXY dropped by 33%, but manages $343 million and has 115% inflow. All four funds confirm that capital continues to flow into VIX products, even as their real returns slip away.
Investors Continue to Increase Investments in VIX-Based Products Despite Rising Costs
Michael Thompson, portfolio co-manager at Little Harbor Advisors, noted:
‘The price of such instruments can spike sharply, almost like an option, only without an expiration date.’
According to him, even if a correction is delayed, holders of long-term ETPs on volatility can remain in the position.
Such funds provide basic hedging for those holding stocks, as the VIX index typically rises when the S&P 500 falls. Unlike in 2018, when mass bets against volatility led to the so-called “Volmageddon,” the current surge in hedging interest does not threaten to cause a market shock.
‘Retail traders now want to act cautiously, to protect their portfolio,’ explained Rocky Fishman, founder of research firm Asym 500.
He estimates that about 40% of open positions in VIX futures are held by exchange-traded funds.
However, maintaining such bets costs money. The UVIX fund charges a 2.8% fee and holds two VIX futures with expirations in October and November. Every day it sells part of the October contracts and buys more November ones, and after expiration, rolls the position further to December.
Since October futures are cheaper than November ones, the fund effectively sells low and buys high, which gradually erodes capital. Rolling positions also puts pressure on the nearest month and lifts the price of the next one.
‘They have to sell the first contract and buy the next one every day to keep the average expiration around 30 days. Logically, the difference between the two nearest months increases, and, ironically, this only raises the cost of holding such instruments,’ explained Matthew Thompson, Michael’s brother and portfolio co-manager.
Strategists Propose New VIX Futures Trading Schemes, Hedge Funds Join In
The problem with rolling positions has been known for a long time. More than ten years ago, retail investors massively bought the United States Oil Fund ETF to track oil’s rise, but their returns lagged behind spot dynamics. Now a similar situation is unfolding in the volatility market: implied volatility remains subdued while stock indexes slowly hit new highs.
Small actual fluctuations make options cheaper, and the VIX index and nearby futures remain under pressure. As a result, the VIX futures curve remains steep, opening up both opportunities and risks.
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At Societe Generale, ideas were proposed on how to use discounts in a contango environment, emphasizing that the curve is also concave and steepens closer to expiration. One strategy is to sell the nearest future and buy the next month, as the first contract usually depreciates faster.
But there is also an obvious danger. Brian Fleming and Kunal Thakkar note:
‘The main risk is a sharp stock sell-off with rising volatility, which will cause the VIX curve to surge and reverse sharply.’
Some investors see such losses as the price of insurance against a market drop. Hedge funds use these instruments for quick speculative trades as well.
