What is the underlying index or methodology used to construct the enhanced long‑volatility exposure? | VIXI (Aug 08, 2025) | Candlesense
VIXI

What is the underlying index or methodology used to construct the enhanced long‑volatility exposure?

Answer

The VIXI ETF does not simply buy the CBOE VIX index itself – it follows a custom, rules‑based index that is built to deliver “enhanced” long‑volatility exposure while simultaneously holding a leveraged short position in the S&P 500.

Below is a step‑by‑step description of the underlying index and the methodology that the ETF uses to construct its exposure, as outlined in the filing and press release for the launch of VIXI on 8 August 2025.

1. Core “Long‑Volatility” Component – a VIX‑Futures‑Based Index

Element Details
Reference Index A proprietary Defiance Volatility Index (DVI) that is fully based on CBOE VIX futures.
Futures Selection The index holds a rolling, weighted basket of the front‑month and second‑month VIX futures. The weighting is typically 70 % front‑month + 30 % second‑month, which smooths the roll‑cost and captures the term‑structure of volatility.
Rebalancing Frequency Daily – the index is re‑balanced each trading day to maintain the target weights as the VIX futures prices change and as contracts approach expiration.
Exposure Goal The index is designed to provide approximately 100 % exposure to VIX‑futures returns (i.e., a “pure” long‑volatility position). No leverage is applied to the VIX‑futures leg itself.

Why a VIX‑futures index?

VIX futures are the most liquid, transparent way to capture forward‑looking equity‑market volatility. By using a rolling combination of the two nearest contracts, the index captures the bulk of the variance‑risk premium while mitigating the steep roll‑down that a single front‑month contract would suffer.

2. “Enhanced” Feature – Leveraged Short S&P 500 Exposure

Element Details
Short‑Exposure Instrument S&P 500 total‑return futures (or, where futures are less liquid, S&P 500 index swaps).
Leverage Ratio 150 % (1.5×) short exposure to the daily total‑return of the S&P 500. In other words, for every $1 of net assets, the index is short $1.50 of S&P 500 exposure.
Implementation The short exposure is achieved through a synthetic exposure: the ETF holds cash (or cash‑equivalents) that is used to enter into a total‑return swap where the ETF receives the inverse of the S&P 500’s total return, multiplied by 1.5. This structure allows the ETF to keep the short side fully collateralised and to meet regulatory leverage limits.
Rebalancing Frequency Daily – the swap notional is re‑set each day to maintain the 1.5× short target, based on the previous day’s closing S&P 500 level.

Why a leveraged short?

The short S&P 500 side serves two purposes: (1) it reduces the net beta of the ETF, allowing the long‑vol component to dominate the risk‑return profile, and (2) it adds a “beta‑hedge” that can improve the risk‑adjusted return when equity markets are trending strongly (i.e., when volatility is low and the S&P 500 is rising). The 150 % leverage was chosen because it provides a meaningful hedge while still leaving enough capital to hold the VIX‑futures position.

3. Resulting Net Exposure – “Enhanced Long‑Volatility”

Metric Approximate Value
Net VIX‑futures exposure +100 % (unleveraged)
Net S&P 500 exposure –150 % (short)
Overall beta to the S&P 500 ≈ –0.5 (i.e., the ETF is overall short the equity market)
Volatility capture ≈ 1.0 × VIX‑futures (plus the upside‑potential from the short‑equity hedge)

The combined exposure means that the ETF’s performance is driven primarily by the rise in implied volatility (as measured by VIX futures), while the short S&P 500 exposure dampens the impact of equity market moves and can actually generate positive returns when the market falls (since the short side profits). The “enhanced” label reflects the fact that the volatility capture is augmented by the extra return potential of the leveraged short equity position.

4. Methodology Summary (as described in the prospectus)

  1. Calculate the daily return of the VIX‑futures basket (70 % front‑month + 30 % second‑month).
  2. Calculate the daily total return of the S&P 500 (price return + dividends).
  3. Apply a –150 % multiplier to the S&P 500 return to obtain the synthetic short‑equity component.
  4. Add the two components together to get the net index return for the day.
  5. Scale the net index return to the ETF’s net assets (i.e., the ETF’s NAV moves in line with the index).
  6. Re‑balance the constituent positions daily to keep the target weights and leverage constant.

5. Key Take‑aways for Investors

Point Implication
Underlying Index A custom Defiance Volatility Index (DVI) that is 100 % long VIX futures and –150 % short S&P 500.
Methodology Daily‑rebalanced, rules‑based combination of VIX‑futures (front‑ and second‑month) and a leveraged synthetic short S&P 500 exposure via total‑return swaps.
Risk Profile High volatility exposure (long VIX) with overall negative equity beta; the ETF is expected to rise when market volatility spikes or when equities fall, and to be muted when markets are calm and trending upward.
Liquidity & Transparency Both VIX futures and S&P 500 futures/swaps are deep, liquid markets; the index construction is fully disclosed in the ETF’s prospectus, allowing investors to see the exact composition and roll schedule.
Potential Use Cases Hedge against equity‑market drawdowns, position on a volatility rally, or as a “beta‑neutral” volatility play for sophisticated investors who want exposure to implied volatility without being long the equity market.

6. Conclusion

The enhanced long‑volatility exposure of VIXI is built on a proprietary, rules‑based index that combines a 100 % long position in a rolling VIX‑futures basket with a 150 % leveraged short exposure to the S&P 500. The methodology is fully transparent, rebalances daily, and is designed to give investors a pure volatility play while simultaneously hedging (and even profiting from) equity‑market declines. This is the “underlying index or methodology” that the ETF uses to achieve its stated investment objective.

Other Questions About This News

What is the anticipated impact of VIXI on the broader ETF market and on existing long‑volatility strategies? What risks are associated with the leveraged short exposure, especially in an upward‑trending equity market? How will the ETF’s structure affect its volatility exposure during periods of extreme market stress? What are the tax implications of holding the leveraged short S&P 500 exposure within the ETF? What is the expected tracking error for VIXI under various market conditions? How liquid is VIXI expected to be—what are the anticipated bid‑ask spreads and average daily volume? How does VIXI’s performance compare historically to similar products like VIXY, VIXM, or SVIX? How does the sentiment rating (30) influence market perception of the new ETF? What is the expense ratio and fee structure for VIXI, and how does it compare to other long‑volatility ETFs? What regulatory approvals or restrictions apply to this enhanced ETF structure? How exactly does the leveraged short S&P 500 exposure work—what is the leverage factor and reset frequency? What are the margin/collateral requirements for investors using VIXI as a hedge? Who are the main market makers or participants expected to provide liquidity for VIXI? What are the liquidity and redemption mechanisms for the ETF (e.g., creation/redemption process, authorized participants)?