A leveraged volatility exchange-traded fund (ETF) is a specialized fund that employs financial engineering techniques, including derivatives like futures contracts, swaps, and options, as well as borrowed capital, to generate 1.5x or 2x multiples of the daily performance of a volatility benchmark. The benchmark for these ETFs is typically a volatility index such as the CBOE Volatility Index (VIX) or a collection of short-term VIX futures contracts.
“These products have proven to be short-time winners in turbulent times,” tending to “move higher as long as market turmoil lingers,” an April 2025 analysis by Zack’s notes. While popular for taking advantage of volatility during market upheavals, these funds adjust their leverage daily, making them suitable for short-term trading and hedging only, not as long-term investments.
Key Takeaways
- Leveraged volatility ETFs seek multiple returns of an underlying volatility index.
- The underlying volatility index is often the CBOE Volatility Index (VIX).
- These products use VIX derivatives and debt to produce leveraged returns.
- Because of their structure, these products tend to decay in value over time, no matter how the underlying index is performing.
- As a result, they are only suitable for sophisticated, intra-day trading strategies.
What Is a Leveraged Volatility ETF?
Traditional index ETFs seek to replicate market performance by holding the same securities in the same proportions as their reference index. For example, an ETF tracking the S&P 500 index would hold shares from all 500 listed companies, which are then weighted proportionally by market capitalization.
Volatility ETFs use an entirely different strategy. These funds don’t hold or follow a collection of shares, but instead target market volatility, which measures how large and frequent price changes occur (as opposed to the market’s direction). These products enable investors to trade market uncertainty by offering exposure to anticipated fluctuations.
Most volatility ETFs follow the CBOE Volatility Index (VIX) or similar indexes. Investors can’t directly invest in the VIX because it is a calculated measure rather than an asset, so these ETFs get their exposure through futures or other derivatives contracts.
Leveraged volatility ETFs build upon standard volatility ETFs by amplifying daily returns, which creates even more complexity. By employing financial derivatives and debt together with other methods, these products significantly increase exposure to volatility indices. A 2x leveraged volatility ETF effectively doubles the daily percentage movement of its underlying index.
So, if VIX futures increase by 3%, then the targeted gain for the 2x ETF is 6% (before fees and expenses). Perhaps the most important thing to know is that while these products amplify returns, they also amplify losses should volatility move against you.
Important
Market volatility is the pace at which asset prices either rise or fall in a given time frame.
How Leveraged Volatility ETFs Work
Measuring Volatility
The CBOE Volatility Index (VIX) is the main tool for measuring market volatility and is commonly known as the market’s “fear gauge.” The VIX measures the implied volatility of S&P 500 index options looking ahead 30 days. The VIX is thus a forward-looking indicator of the expected volatility level, instead of reflecting historical price changes. The VIX reads levels of 10 to 20 during calm markets but can reach 40, 50, or beyond when markets experience stress (it reached 60 in April 2025, and the record is 87, set during the 2008 Financial Crisis).
The VIX remains the most commonly used benchmark for volatility despite alternative measures for different markets, such as the VXN for the Nasdaq 100, VXEEM for emerging markets, and the EUVIX for European equities.
Trading Volatility
While the VIX itself can’t be directly bought or sold (it’s a calculated index, not an asset), investors can gain exposure through several financial instruments:
- VIX Futures: Financial contracts that anticipate the VIX level at preset expiration dates.
- VIX Options: Grant investors permission to buy or sell VIX futures at set prices without requiring them to do so.
- Volatility ETFs/ETNs: Exchange-traded products (like VXX) that track VIX futures indices on a one-to-one basis.
The most accessible method for most investors is through volatility ETFs, which handle the complexity of futures trading behind the scenes.
Adding Leverage to the Mix
Leveraged volatility ETFs add financial leverage to amplify daily returns. As with other leveraged ETFs, these use debt to buy additional futures, swaps, and options to achieve market exposure that surpasses their total net assets. By carefully constructing portfolios of derivatives and cash instruments, these ETFs create synthetic exposure that delivers multiplied returns.
For example, the 2x Long VIX Futures ETF (UVIX) with about $90 million in assets (as of April 2025) uses part of its capital as collateral to borrow to buy swap agreements and futures positions to establish $200 million in exposure to its underlying volatility index. The fund sets a goal of achieving a 2% gain whenever the index advances 1% in a single day, but would incur a 2% loss when the index drops by 1%.
This daily leverage adjustment helps explain why UVIX and other leveraged volatility products may sometimes appear to track their benchmarks closely during trending markets but diverge during periods with sideways or oscillating volatility. The chart below shows the value of the VIX each day versus the prices for a regular volatility ETF and two different leveraged volatility ETFs:
Risks of Leveraged Volatility ETFs
- Amplified losses: While providing multiples to the upside, leveraged ETFs also amplify losses to the downside.
- Volatility drag: The mathematics of daily compounding creates a condition where returns over periods longer than one day depend not just on the overall change in the underlying index but on the specific path taken to get there. When volatility is trading sideways or is whipsawing, leveraged ETFs may lose value over the long run, regardless of the daily VIX levels.
- Contango decay: Due to ongoing roll costs combined with volatility drag and leverage effects, these ETFs face even more value decay during periods of contango in the futures market (where longer-term contracts trade at a premium to nearer-term contracts).
- The Volatility of volatility: Unpredictable changes in volatility itself can lead to extreme price fluctuations in leveraged financial products. The CBOE’s VVIX (VIX of VIX) is a measure of the changes in volatility in the VIX.
- Counterparty risk: When the derivatives needed to generate leverage trade over-the-counter (OTC), it exposes the ETF to counterparty risk.
- Liquidity risk: When markets become stressed, the liquidity of underlying derivatives often diminishes, which can affect an ETF ability to track the underlying index.
Examples of Leveraged Volatility ETFs
- ProShares Ultra VIX Short-Term Futures ETF (UVXY): Seeks 1.5x leveraged exposure to daily changes in the VIX Short-Term Futures Index. This index maintains a constant weighted average futures maturity of one month by holding positions in first- and second-month VIX futures contracts. (Expense ratio: 0.95%).
- Volatility Shares (VS) TRUST 2x Long VIX Futures ETF (UVIX): Seeks 2x leveraged exposure to daily changes in the VIX Short-Term Futures Index. Structured a commodity pool using daily rollovers of first- and second-month VIX futures contracts. (Expense ratio: 0.95%).
- Credit Suisse VelocityShares Daily 2x VIX Short-Term ETN (TVIX/F): Though delisted in 2023, TVIX/F provides an instructive historical example that offered 2× leveraged exposure to the S&P 500 VIX Short-Term Futures Index. TVIX was issued as an exchange-traded note, rather than an ETF, creating a significant credit risk to the issuer.
- ProShares Short VIX Short-Term Futures ETF (SVXY): An inverse ETF rather than a leveraged ETF, SVXY offers an instructive example. It provides inverse (-1×) exposure to the S&P 500 VIX Short-Term Futures Index, essentially a bet against market volatility. (Expense ratio: 0.95%).
Tip
Leveraged ETFs exist for a variety of other indexes and underlying assets, from the S&P 500 to crude oil and cryptocurrency, with both positive and negative (inverse) 2x and 3x leverage.
Examples Using a Leveraged Volatility ETF
A More Typical Market
In a hypothetical example, say that you’re a trader who notices that the S&P 500 index is down 1.5% over the past three days in anticipation of economic news out before today’s market open. As a result, the VIX risen from 15 to 19 over the same period.
You think the economic data will disappoint, sending markets even lower, with volatility even higher in the short term. Anticipating a morning volatility spike followed by afternoon moderation, you place a market-on-open order to buy $10,000 of the UVXY, filled at $40.00-giving them 250 shares with 1.5× leverage. You put a stop-loss order at $39.00 (2.5% loss limit) and a take-profit limit order at $47.50 (an 18.75% take profit goal).
At the open, the headlines are indeed disappointing, extending losses in the S&P 500 by another 1.2%. The VIX spikes to 21, a two-point move that represents a 10.5% increase. UVXY jumps by a full 21%. The take-profit order is filled at $47.50 before the VIX stabilizes around 20.
Example of a Highly Volatile Market
Now, suppose instead you’re trading in April 2025 on the heels of major shifts in U.S. tariff policies. By April 7, 2025, global markets are in turmoil, with the VIX surpassing an intraday level of 50 points—a rare threshold associated with extreme volatility. The VIX ultimately closes at 45.31 that day, a level not seen since the early months of the pandemic in 2020.
In Asia, Japan’s Nikkei 225 index has plunged 7.83% since the tariff volatility began, while Hong Kong’s Hang Sang index plummeted 13.22%, Taiwan’s benchmark dropped 9.7%, and Chinese indexes fell between 7% to 10%.
Anticipating further volatility as tariff announcements continued, you place a market order before the April 8 open to buy $25,000 of the Volatility Shares 2x Long VIX Futures ETF (UVIX) at $59.03, securing 423 shares. You set a stop-loss at $55.00 (7.3% loss limit) and a take-profit order at $77.70 (a 35% profit target).
After the markets open, UVIX trades within a range of $59.03 and more than $105.00. Your take-profit order executes before the full extent of the volatility surge, providing you a $8,750 profit (before trading fees) in less than a trading day.
How Do Leveraged Volatility ETFs Compare to Traditional ETFs in Terms of Risk and Return?
Leveraged volatility ETFs are higher risk and provide different return profiles compared with traditional ETFs. While traditional ETFs typically aim for one-to-one correspondence with their benchmarks and can be suitable for long-term investing, leveraged ETFs are designed specifically for short-term (intraday) trading.
How Do Leveraged Volatility ETFs Differ From the VVIX (VIX of VIX)?
Leveraged volatility ETFs give traders amplified exposure to volatility movements, allowing for potential profits (or losses) from directional bets on market volatility. The VVIX, by contrast, is used primarily as a market sentiment indicator of how much uncertainty exists about future volatility levels.
How Do Changes in Volatility Effect Leveraged Volatility?
Changes in volatility affect leveraged volatility ETFs in several interconnected ways beyond simply amplifying the price. Higher volatility forces larger end-of-day rebalancing, potentially increasing transaction costs and slippage in less liquid markets. It also magnifies the mathematical “volatility drag” that erodes returns in oscillating markets through the compounding of daily returns, among other effects.
The Bottom Line
Leveraged volatility ETFs allow traders to capitalize on sudden changes in market volatility. However, they are among the more sophisticated and high-risk investments available to retail investors. Combining the complexity of volatility tracking with the practical challenges of leveraged daily returns, these products offer potentially amplified short-term gains but shouldn’t be held long term.