ZVOL, the Volatility Premium Plus ETF
Fund Basics
Understanding VIX Futures and Term Structure
To understand ZVOL, you need to know how VIX futures work. The VIX measures expected 30-day volatility in the S&P 500. VIX futures are contracts that bet on where the VIX will be at different future dates.
The Term Structure
VIX futures come in different maturities - near-term (1-2 months), mid-term (4-7 months), and longer-term contracts. Most of the time, longer-dated futures cost more than shorter ones. This upward slope is called "contango."
The Important Connection Between Contango and ZVOL:
Investment Scenario: If ZVOL is short a 5-month VIX future at $20 and the spot VIX is $15, as that contract approaches expiration it will decay toward $15. ZVOL seeks to profit from that $5 difference. This isn't a one-time trade - the rolling process happens daily, creating multiple opportunities to capture potential premium throughout the year.
Why Contango Exists and Creates this Opportunity
- Volatility is Expected to Revert to its Average: In calm market conditions, the spot VIX is often low. However, traders expect that volatility will eventually revert to a higher long-run average. Therefore, longer-dated VIX futures contracts are priced higher to reflect this expectation.
- Time Decay and Uncertainty: Longer-dated futures carry a premium due to the inherent uncertainty of a longer timeframe. The further out in time, the more potential for unforeseen events, justifying higher prices.
- Volatility Risk Premium: Investors are willing to pay a premium to hedge against future market uncertainty, and this demand for protection drives up the prices of longer-dated VIX futures, contributing to contango.
How ZVOL Captures the Premium
ZVOL focuses specifically on mid-term VIX futures - the 4th, 5th, 6th, and 7th month contracts. This is where the strategy gets interesting.
Daily Operations
Short Positions
ZVOL takes short positions in these mid-term contracts
Rolling Strategy
Every day, the fund rolls these positions to maintain a constant 5-month average maturity
Premium Capture
As time passes, these futures may decay toward the spot VIX level
Income Distribution
The fund seeks to distribute captured premiums monthly to shareholders
Why Mid-Term Contracts Matter
ZVOL's focus on mid-term contracts (4-7 months out) is strategic. These contracts offer several advantages:
| Advantage | Description |
|---|---|
| Less Daily Volatility | Unlike short-term VIX ETFs that can swing wildly, mid-term contracts are less sensitive to daily market moves. A 10% spike in the VIX might move short-term futures 8-9%, but mid-term contracts might only move 3-4%. |
| Consistent Contango | The 4-7 month section of the VIX curve stays in contango more consistently than shorter contracts. This provides more reliable premium capture opportunities. |
| Optimal Decay | These contracts are far enough out to capture meaningful premium but close enough that time decay works in ZVOL's favor as they approach expiration. |
How ZVOL Differs from Other VIX ETFs
Most long VIX-linked ETFs purchase VIX futures and may lose money over time due to contango. ZVOL does the opposite.
Compared to Long VIX ETFs:
- Traditional long VIX ETFs buy short-term futures and may get hurt by contango
- ZVOL sells mid-term futures and may benefit from contango
- Result: ZVOL can potentially make money during calm periods when long VIX ETFs lose money
ZVOL seeks to position on the opposite side: Unlike many short VIX products that focus on very short-term contracts (1-2 months out) which can be more volatile during market stress, ZVOL's mid-term focus may provide more stability during volatility spikes.
The Smoothing Effect
By using 4-7 month contracts instead of front-month contracts, ZVOL may experience less dramatic swings. The mid-term positioning acts as a buffer against sudden volatility spikes.
Key Benefits of ZVOL Strategy
Potential Monthly Income Generation
ZVOL seeks to distribute the volatility premium it may capture each month.
Alternative Source of Portfolio Diversification
Unlike bond interest or stock dividends, this potential income comes from a completely different source - the insurance premium that volatility buyers pay. Unlike fixed-rate bonds, ZVOL's distributions may rise when volatility premiums become more attractive, potentially providing enhanced income during favorable periods.
Institutional Strategy Access
This type of volatility premium capture was previously only available to hedge funds and institutional investors. ZVOL makes it accessible through a liquid ETF structure.
The Contango Advantage Explained
Contango is ZVOL's best friend. Here's why this market structure creates opportunity:
Natural Decay
When the VIX futures curve is upward sloping, longer-dated contracts naturally lose value as they approach expiration and converge toward the spot VIX level.
Rolling Profits
When ZVOL closes its short position in an expiring contract and opens a new position further out, it seeks to capture the price difference. If the new contract costs more (normal contango), ZVOL may profit.
Consistent Opportunity
This isn't a one-time trade. The rolling process happens daily, creating multiple opportunities to capture premium throughout the year.
See ZVOL NAV and holdings >
Understanding the Risks
Backwardation Periods
When markets panic, the VIX futures curve can invert. This means shorter-term contracts become more expensive than longer-term ones. During these periods, ZVOL's strategy faces headwinds.
Daily Rebalancing Effects
ZVOL rebalances daily to maintain its target exposure. This compounding effect means returns over longer periods can differ significantly from simple mathematical expectations. The daily rebalancing can create an amplified compounding effect relative to an investment that is not rebalanced daily. "Volatility Decay" expresses the downside risk of this compounding effect which has the greatest negative impact in choppy, up and down markets. On the other hand, in trending markets the daily rebalance can actually amplify returns relative to an investment that is not rebalanced daily.
Market Stress Impact
While ZVOL is less volatile than short-term VIX products, it can still experience meaningful declines during extended periods of high volatility.
Distribution Variability
Monthly distributions fluctuate with market conditions and aren't guaranteed. Some months may have no distribution if conditions are unfavorable.
Portfolio Implementation
Timing Considerations
ZVOL may work best when added during calm market periods when the VIX futures curve shows strong contango.
Monitoring Tools
Track the VIX term structure at sites like VIXCentral.com to understand whether conditions may favor the strategy.
Realistic Expectations
View ZVOL as an alternative income source that will have good months and challenging months, not as a replacement for core portfolio holdings.
How to Trade ZVOL >The Bottom Line
ZVOL offers access to volatility premium capture - a strategy that seeks to profit from the insurance premiums investors pay for market protection. By focusing on mid-term VIX futures and using daily rolling, ZVOL seeks to generate monthly income during the majority of market conditions when contango persists.
The strategy involves substantial risks. During market stress, when volatility spikes and stays elevated, ZVOL may face significant setbacks. But for investors seeking alternative income sources and true portfolio diversification, ZVOL provides exposure to an institutional-quality strategy through a transparent, liquid ETF structure.
Success with ZVOL comes from understanding what you own: an ETF that seeks to collect volatility insurance premiums during favorable conditions, but may experience losses during market stress periods.
Important Disclaimers: This information is for educational purposes only and should not be considered personalized investment advice. Volatility strategies involve substantial risk including potential loss of principal. Consider consulting with a financial advisor to determine if ZVOL aligns with your investment goals and risk tolerance.
Distributions are not guaranteed and may vary significantly from month to month or may be zero. The distribution may include a combination of ordinary dividends, capital gain, and return of investor capital, which may decrease a fund's NAV and trading price over time.
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a ZVOL prospectus or summary prospectus with this and other information about the Fund, please call 866.261.0273 or visit our website at www.volatilityshares.com. Read the prospectus or summary prospectus carefully before investing. An investment in the Fund involves risk, including possible loss of principal. The material available on this site is not an offer or solicitation of any kind to buy or sell any securities outside of the United States of America.
The value of an investment in the Fund could decline significantly and without warning, including to zero. You should be prepared to lose your entire investment within a single day. The Shares will change in value, and you could lose money by investing in the Fund. The Fund may not achieve its investment objective.