In this episode of ETF Spotlight, I speak with Leks Gerlak, Investment Strategist at ProShares, the world's largest provider of ETFs benchmarked to VIX futures indexes.

Markets have been quite volatile of late and in fact, they tend to be volatile ahead of elections. Further, there are rising concerns about the possibility of a disputed election or a delay in election results.

The VIX, popularly known as the “fear index”, had spiked recently and may remain at elevated levels until we have more visibility on the election outcome.

This has resulted in a lot of interest in products that bet on volatility. However, investors should remember that volatility ETFs are very complex products.

The Cboe Volatility Index (VIX) is based on options of the S&P 500 index. As the VIX itself is un-investable, traders use VIX options and futures contracts or exchange-traded products (ETPs) linked to VIX futures contracts.

The VIX and the S&P 500 index are generally negatively correlated and the VIX often surges when stocks plunge, but in July & August, it rose even as the stock market surged.

VIX ETPs are based on futures curve that usually suffers from contango, i.e. futures contracts with longer expirations have higher prices than those with shorter expirations. We discuss how contango impacts VIX ETFs.

Investors should also remember that unlike most other assets that usually increase in price over long periods of time, the VIX has tended to revert to a long-term average after periods of higher or lower levels.     

The ProShares VIX Short-Term Futures ETF (VIXY - Free Report) tracks an index that measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.

The ProShares Ultra VIX Short-Term Futures ETF (UVXY - Free Report) is the 1.5X leveraged version of VIXY.

The ProShares VIX Mid-Term Futures VIX Mid-Term Futures ETF (VIXM - Free Report) tracks an index that measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of five months to expiration.

The ProShares Short VIX Short Term Futures exchange-traded fund (SVXY - Free Report) is an inverse volatility product.

How should investors use these products in their portfolios? Should they be used as short-term tactical tools only? Can they be used for portfolio hedging? We also discuss the risks associated with VIX products that investors need to be aware of.