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Thinking about using a VIX ETF for downside protection? Not so fast

Investors hoping to use an exchange-traded fund that tracks the CBOE volatility index, or VIX, as downside protection or find a value opportunity while the VIX is trading at 2-year lows will find that it doesn't behave like a run-of-the-mill equity index ETF. Over the past five years the daily return for the ETF has fallen as short as 31.8% of the return of the index and at times outperformed the index by more than 15%, although history has more favored the underperformance of the ETF.

A look at the 200-day correlation of the daily returns found that on average the ETF captures only 60% of the index return. Correlations are higher in down periods of the market, making volatility funds more of an opportunistic trade rather than a long-term solution to downside protection.