Volatility Looks Dead. That Means This ETF Could Be Getting Ready to Soar.

I frequently analyze ETFs whose returns are tied to the movement of volatility, specifically to the Cboe Volatility Index ($VIX). I have tracked and have owned several of them over the years. 

To me, being "long" volatility is the key feature of these ETFs. It allows me an alternative to S&P 500 Index ($SPX) put options.  

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Now, though, I'm interested in a different volatility story: the ProShares Short VIX Short-Term Futures ETF (SVXY). 

SVXY is a volatility-driven ETF. However, its goal is to profit from a decline in the $VIX. That is typically what happens when the S&P 500 is rising. 

For simplicity, think of it this way. If ETFs like the ProShares VIX Short-Term Futures ETF (VIXY) and ProShares VIX Mid-Term Futures ETF (VIXM) are the ETF world's alternative to owning put options, SVXY is more like using ETFs as S&P 500 call options. As I see it, these types of funds will always be small holdings. They are just too volatile to be larger positions in your portfolio. 

That said, if I allocate 1%, 2% or 3% of a portfolio to SVXY, that's all I can lose. But the upside can be pretty big.

Why is SVXY a play to consider now?

Following brief, localized spikes in the VIX, the market's broad "fear gauge," the standard spot VIX has continuously struggled to maintain any persistent upward momentum, routinely sliding back toward its historical baseline. As someone who continuously hedges his equity portfolio against sudden disaster, this is something I see every day, in vivid color.

In fact, recently, I've pointed out in my work here the many cracks I see in the U.S. equity market, particularly the Nasdaq-100 Index ($IUXX), which has led the broader market higher for years. So the idea of volatility steadily declining as it has recently doesn't add up cleanly to me. 

But I'm devoted to the charts. And if I follow them as I read them, there is a growing trend toward a lower $VIX, and thus a higher SVXY.

SVXY has been around for nearly 15 years, and is under the radar at just $224 million in assets. Interestingly, this ETF has more than doubled over the past five years, up 107%. That's versus SPY's return of 71%.