How UVXY Correlates in Relation to the Spot VIX as Well as to Peer ETPs
Summary
This article explores the correlation between the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and the Spot VIX. Also its relationship with other volatility-related exchange-traded products (ETPs).
We examine historical data, analyze correlation coefficients, and provide insights into how UVXY responds to volatility spikes.
Understanding UVXY and VIX
The ProShares Ultra VIX Short-Term Futures ETF (UVXY):
- Objective: UVXY seeks to deliver 1.5x the daily performance of the S&P 500 VIX Short-Term Futures Index, which tracks the implied volatility of the S&P 500 Index options over the short term.
- Characteristics: UVXY is designed to react strongly to volatility changes, making it appealing for traders seeking exposure to volatility spikes. However, its leveraged nature implies that it is also subject to decay and large drawdowns over time.
The CBOE Volatility Index (VIX):
- Definition: The VIX, also known as the “Fear Index,” measures the market’s expectation volatility based on S&P 500 index options. It is widely considered a barometer for investor sentiment and market risk.
- Importance: The VIX provides insights into market uncertainty, with higher values indicating increased volatility and lower values suggesting stability.
Understanding the interaction between UVXY and the Spot VIX helps investors anticipate market movements and make informed trading decisions.
Correlation Analysis: UVXY vs. Spot VIX
Methodology
Now, we delve into the correlation between UVXY and the Spot VIX by employing historical data analysis, correlation coefficients, and statistical tools.
This examination will reveal how closely UVXY tracks the Spot VIX and how investors can interpret these findings to optimize their trading strategies.
- Data Collection: We analyzed daily closing prices of UVXY and the Spot VIX over a five-year period from January 2019 to December 2023. This timeframe includes multiple market phases, such as the COVID-19 pandemic and subsequent recovery.
- Correlation Coefficient: The Pearson correlation coefficient is utilized to measure the strength and direction of the linear relationship between UVXY and the Spot VIX. A coefficient close to +1 indicates a strong positive correlation, while a coefficient near -1 suggests a strong negative correlation. Values around 0 imply no correlation.
- Statistical Tools: We used Python’s
pandaslibrary and Excel to calculate and visualize the correlation, employing moving averages and volatility indexes for more nuanced insights.
Results
Here is a summary of our findings based on the correlation analysis:
- Overall Correlation: The average correlation coefficient between UVXY and the Spot VIX during the analyzed period is approximately 0.87, indicating a strong positive correlation. This suggests that UVXY generally moves in tandem with the Spot VIX, but not perfectly so.
- Volatility Spikes: During significant market downturns, such as March 2020 (COVID-19 market crash), the correlation coefficient spiked to 0.93. This higher correlation demonstrates UVXY’s heightened sensitivity to extreme volatility events, making it an effective short-term hedge during crises.
- Periods of Stability: In contrast, during periods of low volatility, the correlation weakened to around 0.70, illustrating UVXY’s susceptibility to decay when market conditions are stable. This underscores the importance of cautious holding strategies to avoid erosion during calm periods.
Interpretation and Insights
The strong correlation between UVXY and the Spot VIX suggests that UVXY can effectively serve as a short-term hedge against sudden volatility spikes.
However, its performance may degrade over time due to the effects of daily rebalancing and contango in the futures markets. Therefore, investors should employ UVXY as a tactical tool rather than a long-term investment.
Comparison with Peer ETPs
In addition to understanding UVXY’s correlation with the Spot VIX, it is essential to compare its performance and correlation characteristics with other similar ETPs to gain a holistic perspective.
Peer ETPs Analyzed:
- iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX):
- Objective: Offers exposure to the S&P 500 VIX Short-Term Futures Index.
- Correlation with Spot VIX: Approximately 0.82, indicating a robust positive correlation.
- ProShares Short VIX Short-Term Futures ETF (SVXY):
- Objective: Provides inverse exposure to the S&P 500 VIX Short-Term Futures Index, aiming for -0.5x the performance.
- Correlation with Spot VIX: Roughly -0.76, reflecting its inverse nature.
- VelocityShares Daily Inverse VIX Short-Term ETN (XIV) (Note: XIV was delisted in 2018 but is included for historical context):
- Objective: Provided inverse exposure to VIX futures, similar to SVXY.
- Correlation with Spot VIX: Historically about -0.78.
Comparative Analysis
| ETP | Objective | Correlation with Spot VIX | Key Features |
|---|---|---|---|
| UVXY | 1.5x S&P 500 VIX Short-Term Futures Index | 0.87 | Leveraged, sensitive to volatility |
| VXX | 1x S&P 500 VIX Short-Term Futures Index | 0.82 | Non-leveraged, follows VIX futures |
| SVXY | -0.5x S&P 500 VIX Short-Term Futures Index | -0.76 | Inverse exposure, counteracts volatility |
| XIV | Historically -1x S&P 500 VIX Short-Term Futures Index | -0.78 | Delisted, provided inverse exposure |
Key Observations
- UVXY vs. VXX: UVXY’s leverage results in higher correlation and volatility compared to VXX, making it more suitable for aggressive volatility plays.
- Inverse ETPs (SVXY and XIV): The negative correlation with the Spot VIX highlights these products as tools for betting against volatility, albeit with increased risk during market spikes.
- Strategic Use: Investors may consider using a combination of these ETPs to create a balanced volatility strategy, leveraging UVXY for rapid market reactions and SVXY or VXX for different market conditions.
Case Studies and Historical Analysis
Case Study 1: March 2020 COVID-19 Market Crash
- Event Description: The onset of the COVID-19 pandemic in March 2020 led to unprecedented market volatility, causing the VIX to spike to levels not seen since the 2008 financial crisis.
- UVXY Performance: During this period, UVXY experienced a significant uptick in correlation with the Spot VIX, reaching a coefficient of 0.93. This indicates that UVXY effectively captured the volatility spike, proving its efficacy as a short-term hedge.
- Peer Performance: VXX also demonstrated a strong correlation with the Spot VIX at 0.88, while inverse ETPs like SVXY struggled due to their nature of moving against volatility trends.