Are 2 New Volatility Funds the Right Fits for Your Portfolio?

NEW YORK (TheStreet) -- Whenever market volatility spikes, investors are likely to start hearing about the VIX, also known as the "fear index." The VIX is a widely followed measure of options volatility on the S&P 500, and over the years approximately 15 exchange-traded funds designed as plays on the VIX have come to market.

Two of the newest VIX ETFs debuted Tuesday, offering prospective investors potentially more efficient avenues for profiting from changes in volatility. Let's have a look at these new products to if they are suitable for average investors.

AccuShares Investment Management launched the AccuShares Spot CBOE VIX Up Shares (VXUP) and AccuShares Spot CBOE VIX Down Shares  (VXDN), both of which are designed to mirror the "spot," or actual market price, of the VIX. Investors who want to bet that volatility is set to rise would choose the VIX Up Shares ETF. Vix Down Shares is designed to reflect the inverse performance of spot VIX prices, meaning it's for those investors wanting to wager on a drop in volatility.

The new VIX products, the first linked to the spot CBOE VIX, have an advantage over their more established rivals. Those older VIX ETFs are futures-based, which exposes investors to issues when rolling contracts in the futures market.

The previously available VIX products have to sell futures contracts that are closest to maturity and then buy later-dated contracts. Think about that strategy this way: As a futures contract gets closer to expiration it loses value, meaning the longer-dated contracts are worth more, so by selling the expiring contract to buy a longer-dated equivalent, futures-based VIX products essentially sell low and buy high.

While typical VIX ETFs hold futures contracts, the AccuShares Spot CBOE VIX ETF holds only cash and cash equivalents, which helps reduce some of the complexity associated with legacy VIX exchange traded products.

However, the new VIX offerings are not inexpensive, at least not by the standards of the usual ETF. Holding either the AccuShares Spot CBOE VIX Up Shares or the AccuShares Spot CBOE VIX Down Shares will cost investors 0.95% per year, or $95 per $10,000 invested. Additionally, the long spot VIX product has a daily expense of 0.15%, which is used as compensation for those taking the risk of shorting the VIX via the AccuShares Spot CBOE VIX Down Shares.

"In addition, AccuShares incorporates an industry-first "corrective distribution" mechanism that may help to prevent prices from deviating from spot index values. Each month, AccuShares Spot CBOE VIX ETF funds plan to distribute index returns and reset share values, thereby limiting the risk that Up and Down shares become disjointed and providing a transparent return stream for investors," according to AccuShares.

While hedging volatility is a good plan, many investors do not view volatility as an asset class or know how to implement volatility products into their portfolios.

"The view that most people take is that they look at it (volatility) as a separate asset class because it's typically negatively correlated with the holdings investors typically have like broad-based equity indexes," said AccuShares CEO Jack Fonss in an interview with TheStreet. "Volatility as an asset class is an asset class is a bit of a misnomer. We think of it more as a tactical tool."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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