There may be no perfect volatility product on the market, but smart ETF investors can profit in trendless markets with a little fancy footwork.

I agree with Matt (shocking, I know) that the VIX isn’t a great way to actually invest in volatility—even if you could buy it in pure, unrefined form, which you can’t. But as always, the question investors should be asking themselves is: “What am I actually trying to do?”

If you ask most people why they’re interested in volatility, it’s not that they see volatility as a bad thing, period. It usually comes down to one of two things:

1) They’re trying to protect themselves from downside volatility.

2) They’re trying to profit from flat, volatile markets.

The first objective is the easiest one for a sophisticated investor to achieve, with or without ETFs. Worried that your portfolio is going to take a 20 percent drop in the next year? The options market has a fun little product called a “put” just for you. So-called suicide puts are cheap. With the S&P 500 SPDR (NYSEArca: SPY) trading at $119 as I type this, you can buy the right to sell your SPY for $100 in December for the rock-bottom insurance premium of about $3 a share.

Making money in a flat market, however, is more complicated. Again, the options markets offer many ways to play this game. The easiest, perhaps, is just writing call options against your SPY position and pocketing the change.

But sophisticated ETF investors have another way to play this game: taking advantage of the compounding nature of leveraged and inverse funds. As we’ve covered here many times, one of the features—or problems, depending on your perspective—of most leveraged or inverse ETFs is that they provide a daily return. This results in giving you a compounding effect in trending markets, and a deterioration effect in trendless markets.

Just to reiterate it—here’s how the math works between a leveraged fund and a traditional fund:

In this worst case scenario, the 2x ETF investors lose about 2 percent of their money, even though the underlying index is completely flat over this hypothetical two-day period.

Most of the time, this gets covered in the financial press as a negative, because if you’re trying to achieve double the returns of the S&P 500, you need to constantly adjust your holdings.

But here’s the neat part—in a truly trendless market, you can short out that deterioration effect and effectively cash in on the volatility effect. A market-neutral bet might be to go short the 2x ETF, using something like the ProShares Ultra S&P 500 (NYSEArca: SSO), while taking a corresponding long position in the S&P 500 with SPY. Such a strategy, on a daily basis, is market neutral. But over any trendless period, the value of that short position will deteriorate (in your favor) while your market position remains flat.

The months surrounding the March 9 bottom last year provide a perfect example of how this works:

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