Why Volatility ETFs Deserve Attention as a Short-Term Play

The year began on a volatile note, with heightened geopolitical uncertainties and tariff tensions accounting for much of the uncertainty in January. Even so, markets proved resilient, with the S&P 500 finishing the month in positive territory, gaining about 1.9%.

However, volatility has picked up significantly in February, marked by a sharper risk-off shift and a broad market sell-off. Investor concerns have also rotated, with uncertainty around the AI trade replacing geopolitical risks as the dominant source of market anxiety.

The S&P 500 has declined about 1.9% this week as of the Feb. 12 close and is down roughly 2.1% so far this month. Meanwhile, the CBOE Volatility Index surged nearly 21% on Thursday, bringing its February gain to roughly 30%, a clear sign that volatility and investor nervousness are intensifying.

AI Concerns Rattle Investors

Last week’s “software-mageddon” sell-off and growing scrutiny of Big Tech’s AI spending reflected growing fatigue around the AI trade.

The weakness spilled into financial stocks on Tuesday and later spread to trucking, logistics and real estate services, which came under heavy selling pressure on Thursday as investors adopted a “sell first, ask questions later” approach to AI-related risks, as per Yahoo Finance.

Additionally, rising concerns over AI-led disruption have also driven a clear divergence in the travel and leisure sector, with online booking platforms bearing the brunt of the sell-off, while traditional hotel operators gain favor, according to Bloomberg, as quoted on another Yahoo Finance article.

Debt Concerns Refuse to Fade

The U.S. government’s increasing national debt continues to create an income problem for investors. With the national debt currently standing at $38.65 trillion and federal debt held by the public at $30.92 trillion, the Congressional Budget Office (CBO) projects debt held by the public to climb to $56 trillion or 120% of GDP by 2036. Such elevated debt levels create economic headwinds, including sustained inflationary pressure.

The projected rise in large and sustained budget deficits between 2026 and 2036 is expected to push debt levels even higher over the next decade, with the deficit projected to widen from $1.9 trillion in fiscal 2026 to $3.1 trillion by 2036, as per the CBO (Read: ETFs Worth Watching as Debt Pressures Continue to Build).

This backdrop underscores the need for investors to sharpen their focus on short-term portfolio positioning, where increasing exposure to volatility ETFs stands out as a compelling strategy.

How Volatility ETFs Help Investors Play Uncertainty

Increasing exposure to volatility ETFs as a short-term allocation may help hedge downside risks, proving to be a winning move for investors. Taking precautions upfront is better than facing avoidable risks later. These funds have delivered short-term gains during periods of market chaos and may climb further if volatility continues.

Investors with a long-term horizon may be able to look past these near-term uncertainties. However, in the current economic environment, volatility-focused funds and strategies are ideal for investors with a short-term horizon.

With the potential for increased volatility, adding these ETFs may be a smart strategic move (See: all Volatility ETFs here).

ETFs to Explore

Below, we have highlighted a few funds that investors can consider to gain increased exposure to volatility ETFs.

iPath Series B S&P 500 VIX Short-Term Futures ETN VXX

iPath Series B S&P 500 VIX Short-Term Futures ETN seeks to track the performance of the S&P 500 VIX Short-Term Futures Index Total Return. The index offers exposure to a daily rolling long position in the first and second-month VIX futures contracts.

iPath Series B S&P 500 VIX Short-Term Futures ETN charges an annual fee of 0.89%. VXX has gained 3.76% over the past month and 6.16% on Feb. 12.

ProShares VIX Short-Term Futures ETF VIXY

ProShares VIX Short-Term Futures ETF seeks to track the performance of the S&P 500 VIX Short-Term Futures Index, which measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future.

ProShares VIX Short-Term Futures ETF is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. The fund charges an annual fee of 0.85%. VIXY has gained 3.64% over the past month and 6.33% on Feb. 12.

ProShares VIX Mid-Term Futures ETF VIXM

ProShares VIX Mid-Term Futures ETF seeks to track the performance of the S&P 500 VIX Mid-Term Futures Index, which measures the movements of a combination of VIX futures and is designed to track changes in the expectation for VIX five months in the future.

ProShares VIX Mid-Term Futures ETF is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. The fund charges an annual fee of 0.85%. VIXM has gained 0.41% over the past month and 1.11% on Feb. 12.

What Long-term Investors Should Focus On

For long-term investors, increasing exposure to diversified, less concentrated ETFs can offer a more stable path forward. Pairing this with strategies like buy-the-dip, dollar-cost averaging and a disciplined buy-and-hold approach can make it easier to navigate short-term market volatility while staying focused on long-term goals.

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This article originally published on Zacks Investment Research (zacks.com).

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