ProShares’ SVXY and UVXY

ProShares was the first  Exchange Traded Fund (ETF) provider for volatility based funds.  The previous volatility entries from Barclays (e.g., VXX & VXZ) were all Exchange Traded Notes (ETN).  Click on the underlined ETF / ETN for discussions on how these types of securities work.  Proshares has done well and currently has the most assets in the volatility ETP space.

UVXY (1.5X long) and SVXY ( -0.5X inverse daily percentage long) track the SPVXSP index which specifies a mix of the two next to expire VIX futures to give an approximate 30 day effective time until expiration. These funds are large enough that their bid/ask spreads and liquidity characteristic are very good.

Some salient characteristics:

  1. UVXY and SVXY have options available
  2. Tax treatment:   Because UVXY and SVXY explicitly hold VIX futures the IRS counts them as partnerships that need K-1 forms filed for taxable accounts at tax time.  The VelocityShares ETN’s tax treatment is the same as regular stocks.  On ProShares’ website (point 1) they elaborate:
    • K-1 reporting: With volatility, commodity, currency, and managed Futures ProShares will invest in a range of derivative instruments, including futures and forward contracts. In general, open futures positions will be marked to market, with their capital gains and losses reportable on a Schedule K-1. The reporting of gains and losses may vary depending on the specifics of a contract.  See here for more on K-1 tax reporting and the ability to access your K-1 reports on-line if you have held ProShares volatility ETFs.
    • This income (loss) might be categorized as under 1256 contracts. These generally result in 60% long-term and 40% short-term gains/losses on the investor’s tax return regardless of how long you held the shares.
  3. Credit risk:  Because ETF’s explicitly hold the underlying futures and swaps contracts that track the index their credit risk is lower than an ETN’s.  With ETN’s you are essentially depending on a single company (e.g., Barclays in this case) to honor their debts.   Barclays is a big banks with a good credit rating, so I think this risk is pretty small.   See ETN Credit Risk for more information.
  4. Termination risk:  With ProShare’s funds I can’t find any mention of termination criteria in the prospectus, except for the generic, “we can terminate whenever we want” clause.  With a -0.5X short daily percentage volatility fund it would take more than a doubling of volatility on the long side (e.g., VXX ) to wipe out the short side.  My assumption is that ProShares would terminate SVXY rather than allow its NAV to go negative.

UVXY and SVXY prospectus

For a complete list of available volatility, ETFs and ETNs with links to associated indexes and information see Volatility Tickers.

First posted on

Click here to leave a comment

18 thoughts on “ProShares’ SVXY and UVXY”

        • Thanks, I think I understand now. The K-1 will deal with how the shares are taxed based on the funds positions as explained in item 1 (portion 1256, portion ordinary income, short term capital gains). The Options are treated 100% as 1256 contracts. I assume there will not be a K-1 for options?

          My brokerage is treating my UVXY options as 1256, so that will give me 60/40. The SVXY shares I owned, I will get a K-1 for that and also 1099 from brokerage. UVXY short shares, I’m not sure if I will get a K-1 for those shares I had shorted and covered because I was in a short position and not a long position.

          • I’m surprised that your UVXY options are being treated as 1256. It’s a murky area. I would expect you would get a K-1 for short shares, but not m area of expertise.

          • Yes, my large brokerage is treating UVXY options as 1256, they even marked to market at the end of the year all my 2018 spreads. Someone told me they called my brokerage and they said they were treating it as 1256. I assume SVXY options are the same also based on my large long term capital gain but I didn’t have any SVXY options at year end to get marked to market.

            Thanks for clarifying that link, that explains the how the shares will be taxed based on how the K-1 splits it all up. Hopefully the shares will have lots of section 1256 gains.

          • I had things wrong, It looks like all options based directly on futures (e.g, SPX, VIX, UVXY, SVXY) get the 1256 treatment. VXX is an ETN so it would get the 1099 treatment.

          • I’m no tax expert but invoking section 1256 contracts for VXX options seems a bit far-fetched to me. Barclays won’t even commit to what VXX’s underlying is in their prospectus…

  1. I’ve tried to short TVIX without success as my broker doesn’t offer shares for shorting. There’s no 2x inverse volatility ETF, right? Is there one on the horizon?

  2. Hi Vance,

    What opinion do you have about SVXY? What difference is between SVXY and XIV? I heard that ETFs is better than ETNs, but I don´t know why….


    • Hi Fernando,
      The differences between SVXY and XIV are small. The annual fee may be different and the termination process for SVXY is not specified in their prospectus–but like XIV these inverse funds can terminate if volatility jumps too much in a day. Practically the bid / ask price will probably be better with XIV because of its higher volume. The main difference between ETFs and ETNs is that with ETFs the actual securities are delivered as part of the share creation process, whereas ETNs only have money that goes back and forth. ETNs hedge the product internally, but there is no visibility into that, so that adds a element of risk (small in my opinion). ETFs have more complications with USA taxes, because you are dealing with futures/commodities. ETNs tax-wise are treated like bonds, so they have a simple tax treatment.

      — Vance

  3. I’m hoping things will be getting back to normal soon. The 5-day moving average for XIV is about to top the 20-day moving average… first time since this crisis began…

  4. Guys, I need some help understanding the behaviour of vxx and backwardaion.
    I remeber the rule thumb that basically vxx should give half the yield of the vix index, for example vix going up 5 % gives ~ 2.5% in the vxx. With backwardation in place we could see days of +5 and +4 foe example. The question is what is going on when the vix goes down sharlpy but there is still backwardation? Last week there were days like -8 % of vix and -7% of vxx, where is the backwardation here? the spread between the first and second contract was getting smaller but the first contract is still higher (only today they got even),so I would expect a day of -8 % in the vix to give something like -3 to -4 % in the vxx, can you please explain to me the behaviour of vxx?

    • Hi Jones,
      I’ve noticed that VIX and VXX are not acting typically. These are not typical times. VIX has been at elevated levels for quite a while and backwardation has really been driving the value of VXX up. My sense is that options buyers/sellers are becoming significantly less nervous (or maybe just jaded), so the premium on options drops dramatically on up days. This leads to big drops in the VIX. The decrease in backwardation shows that the futures market is becoming less fearful of a big drop off–it appears they are more bullish than the options market.

      Bottom line, during a transitional time like this the rules of thumbs don’t seem to apply. The options market and the futures market are only loosely coupled, so there is no arbitrage that would keep them in sync with each other.

      I think the usual 50% factor is due to effective timeframe of VXX being 60 days and the VIX being 30 days. I know VXX is stated as being a rolling position with a 30 day outlook, but since the front month syncs up at expiration with VIX–which is a 30 day outlook, that the combination of the first and second month would give a longer effective outlook.

      I doubt the previous stuff helps, but that’s my muddled understanding.

      — Vance


Leave a Comment