SUMMARY

• UVIX is the only 2x leveraged VIX futures ETF.
• UVIX tracks twice the daily performance of the Long VIX Futures Index (Ticker: LONGVOL).
• UVIX may be a useful trading tool.
• Download as a PDF.

On March 30, 2022, Volatility Shares introduced the 2x Long VIX Futures ETF (Ticker: UVIX). After a gap of one and a half years, UVIX reintroduced 2x leveraged VIX futures exposure to the U.S. ETF market. This article introduces how UVIX works, including how it trades, what it tracks, and its potential tax treatment.

UVIX IS A 2X DAILY RESETTING LEVERAGED ETF
UVIX seeks investment results, before fees and expenses, that correspond to twice the daily percentage moves of the LONGVOL Index*.For example, if LONGVOL goes up 10% in one day, the goal for UVIX is to go up 20% that day.

UVIX differs from existing and previous VIX-linked ETFs in at least two important ways. First, UVIX is 2x leveraged long, compared with competing products that are either 1x or 1.5x leveraged long. And second, UVIX tracks 2x the LONGVOL
Index rather than the legacy S&P 500 VIX Short-Term Futures Index (SPVIXSTR) that VIX ETFs have historically tracked.

This second difference is important because LONGVOL differs from previous indexes by using a 15-minute time-weighted average price (TWAP) of the underlying VIX futures’ contracts in addition to their settlement to calculate its end-of-day closing value. The use of the LONGVOL Index aims to make UVIX less sensitive to the sometimes volatile end-of-day dynamics of the VIX futures
market.

LONGVOL is calculated and maintained by the CBOE who posts the daily open/high/low and closing values along with history on their CBOE Index Dashboard here. Additionally, Yahoo Finance publishes the current value using the ticker (^LONGVOL).

Lastly, the Net Asset Value (NAV) for UVIX is published daily on the Volatility Shares' website here.

HOW UVIX TRADES
UVIX is an ETF which trades like a stock. It can be bought or sold whenever the market is open, as well as during pre-market and after-market periods. With an average bid/ask spread of a penny, and notional average daily volume in the millions, UVIX offers considerable liquidity.

UVIX is generally available to trade in tax-advantaged accounts (i.e. IRAs), although your broker/dealer may require you to read and electronically sign a document that describes the various risks of trading complex products. Please always read the prospectus for the fund before considering trading. The prospectus for UVIX can be found here.

CONTANGO
Since their inception, VIX futures with more time until expiry have traded at higher prices than futures nearer to expiry approximately 80% of the time¹. This upward sloping term structure is known as contango. Futures in contango can erode returns of funds that roll futures forward.

VOLATILITY DRAG
To position UVIX to deliver 2x the daily performance of LONGVOL, UVIX must adjust its futures holdings at the end of each trading day – effectively buying futures in a rallying market and selling futures in a declining market. The longterm effect of buying and selling in volatile markets may result in what is called volatility drag and may result in losses.

LEVERAGE COMPOUNDING
Conversely, leveraged compounding in leveraged ETFs occurs when daily prices follow a trending path. For example, if the day-to-day price action is generally in the same direction, then the rebalancing activity that UVIX performs each day may compound the ETF’s daily leveraged returns and may cause the ETF to outperform the 2x daily objective over a longer period.

UVIX USAGE CASE
UVIX has no resemblance to a blue-chip stock that you buy and hold in your portfolio. However, traders may buy UVIX, or adopt a short-term bullish strategy with its options, in expectation of a market crash. VIX-linked futures and ETFs are perhaps the only investible asset that has historically gone up when the broader market goes down.

Furthermore, during strong market downturns, volatility has historically trended up², and during such a trending period, UVIX may outperform its 2x leverage goal. The reason for this outperformance is the leveraged compounding discussed above.

Dramatic performance during market crashes is a key feature of leveraged long volatility ETFs, but there are significant cautions and caveats. First, it’s notoriously difficult to predict when market crashes will occur. Volatility climbs rapidly when panic spreads through markets, but once the fear in equity markets starts to fade, volatility tends to collapse quickly, giving up much of its gains very quickly. For example, approximately one week after its March 18, 2020 peak, 2x the LONGVOL Index fell approximately 59%³. A long volatility trader’s timing must be good on both entry and exit to be successful.

UVIX STRUCTURE AND TAX TREATMENT
UVIX is registered under the Securities Act of 1933, and, as such, will report gains/losses via IRS Schedule K-1 rather than a 1099 for taxable accounts. While this may add some complexity to tax reporting, it also may have some potential benefits. For example, gains may qualify for treatment as 1256 contracts, where gain/loss are split 60% long-term and 40% short-term regardless of how long the shares are held.

CONCLUSION
UVIX is an ETF intended for sophisticated traders and should not be viewed as a “buy and hold” investment. Traders will need to proactively manage their positions as frequently as daily.

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