BetaPro Management Inc. has launched two new exchange traded funds which track the level of volatility on the S&P 500 index.

The two new funds are the first ETFs in Canada to track the performance of the S&P 500 VIX Short-Term Futures Index.

The index is comprised of first and second month futures contracts that are based on the CBOE Volatility Index, which is known as the VIX index. Launched in 1993, the VIX index reflects the market’s expectation of volatility over the next 30-day period, by measuring put and call options activity on the index. A relatively high VIX Index level corresponds to expectations of a more volatile U.S. equity market as expressed by more costly put and call options on S&P 500 index futures.

The Horizons BetaPro S&P 500 VIX Short-Term Futures ETF, which trades on the Toronto Stock Exchange under the symbol HUV, is designed to provide investment results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that correspond to the performance of the index.

The Horizons BetaPro S&P 500 VIX Short-Term Futures Bull Plus ETF, which trades under the symbol HVU, is designed to provide daily investment results that correspond to twice the daily performance of the S&P VIX S-T Index. The HBP Double VIX ETF does not seek to achieve its stated investment objective over a period of time greater than one day.

“These two new ETFs offer investors the opportunity to gain exposure to changes in levels of volatility in the U.S. stock market,” said Howard Atkinson, president of BetaPro. “Therefore stock market volatility does not necessarily need to be something that investors have to fear.”

BetaPro warns that the two new ETFs should only be used for short periods of time, and should be monitored on a daily basis. It notes that VIX Index futures contracts have exhibited very high contango in the past, which occurs whenever the price of the distant contract delivery months is higher than the current month contract. This can create a so-called “negative roll yield,” reducing the returns when the funds are held for long periods.

The company also warns that the ETFs are speculative investment tools, and are subject to aggressive investment risk and price volatility risk.

The HPB Double VIX ETF is also subject to leverage risk, since it uses leveraged investment techniques that magnify gains and losses and result in greater volatility in value.

Since the VIX Index tends to move in the opposite direction of the S&P 500 index, the returns of the ETFs will likely be inversely correlated to an investor’s U.S. equity holdings, according to BetaPro.

It suggests that the ETFs could be used for diversification, or as a partial hedge against market conditions.

Any U.S. dollar gains or losses as a result of the ETFs’ investments will be hedged back to the Canadian dollar.

The new ETFs began trading on the TSX on Thursday.

IE