Explain VIX ETFs to me like I'm 5

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VIX is:

a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period.
More...

Source:
http://en.wikipedia.org/wiki/VIX

I know there are VIX futures but not all brokers offer them so some people may have to trade ETFs instead.

I've seen the following:

VXX (S&P500 short-term futures)
IVO (inverse)
XXV (inverse S&P500)

2x:
SVXY (ProShares short VIX short-term)
TVIX (VelocityShares Daily 2x VIX short-term)
VZZ (Long Enhanced S&P500 mid-term)
VXZ (S&P500 VIX mid-term futures)
VIXM (ProShares mid-term futures)
VIXY (ProShares short-term futures)
XVIX (daily long-short VIX)

And more. Why are there so many?

What is the difference between short, mid, and long term with regard to VIX indexes?

I understand the difference between the regular and the 2x ones.

Some of them are not what I expect.

For example, here is a chart comparing VXX with XXV, which I would expect to be exact opposites of each other, yet they are obviously not:

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Why? Inverse S&P 500 ETFs are roughly the opposite of S&P 500 funds. Why is an inverse VIX ETF not roughly the opposite of a VIX ETF?


Even two VIX ETFs that have the same description, such as TVIX and VIXY (both are 2x short term) are not even:

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Also, what happened to IVO?

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Why are there so many?

-- each fund company wants to make money from their fee to administer the ETF.

What is the difference between short, mid, and long term with regard to VIX indexes?

-- the timeframe of the expiry of the holdings in the fund.

Inverse S&P 500 ETFs are roughly the opposite of S&P 500 funds. Why is an inverse VIX ETF not roughly the opposite of a VIX ETF?
Even two VIX ETFs that have the same description, such as TVIX and VIXY (both are 2x short term) are not even:

-- depending what derivitives are in the fund and what price/time they were entered, there will be variations between funds, as the funds "seek to replicate the index" but don't necessarily do so.

...
I don't really trade volatility, but I think if you want to really trade it, it is best to do it with options on the $vix index itself rather than using these ETFs.
 
You left out one of the main ones, XIV.

The answers to your questions are complex. First, you have to understand that these products are intended to track daily moves in the VIX. Once you go beyond a day, tracking errors appear. Trackign errors arise because they are path dependent. If VIX goes from 10 to 20 over a month, the outcome will be very different for these products if it went up .5 every day or up one day and down the next.

Another issue arises because VIX itself is not tradeable. There are futures on VIX but they do not track cash VIX for a number of reasons, chiefly the lack of arbitrage and the fact that they settle at the value on expiry, not the instant vlaue.

Since the VIX ETF's and ETN's have to use derivatives to track the underlying, more tracking errors are introduced depending upon the term structure of the futures contract, ie contango or backwardation.

I'm just scratching the surface here. These products can be very dangerous and behave differently than you might anticipate. Mostly, they are intended for day traders, not investors.
 
I can tell you the only people who can truthfully and correctly explain these funds are those who understand the actual vix futures deeply..but then I doubt they would understand these funds as there is no reason to master them when you can replicate fund combo's in the futures.

Count me as one who knows...I'm relatively certain no one really gets these very well.
 
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