The VIX has been around in one form or another since 1993. It was revamped 10 years later. And VIX futures contracts have been around since then, some five years. Fishback has tracked how futures prices rise and fall compared to the VIX itself, beginning in 2004.

That's how he can talk with authority about the differences between the actual VIX benchmark and futures pricing correlations. An example given by Fishback is what happened last year.

On June 30, 2008, the VIX was at 23.95. Meanwhile, futures were hovering at 24.02 for October expiration dates; 23.68 in November and 23.19 in December.

Even on Sept. 10, a day before Lehman declared bankruptcy, the VIX was at 24.52 and October futures were at 24.31. And futures contracts with later expiration dates going out four months hadn't deviated much from the VIX index itself.

But fast-forward to a post-Lehman era in stock markets. On Sept. 29, the VIX hit 46.72. At the same time, October futures only climbed to 32.69. And December contracts only got up to 28.03.

"The VIX almost doubled but the futures barely budged," said Fishback.

Ongoing Story... 

The story doesn't end there. The VIX skyrocketed up to 69.95 on Oct. 10. The October futures, which were about to expire, gained 24 points to 56.71. But November futures were way down at 38.31 and December futures hardly moved at all, settling at 33.79.

So what happened to investors who thought that volatility had peaked and used trading vehicles that were based on futures contracts?

On Dec. 2, the VIX fell about 7 percentage points to 62.98. Indeed, volatility had topped out. But the December futures contract gained more than 24 points to 57.93 during that same period. "So anyone who made a bet expecting volatility to decline was right," said Fishback. "But if they were selling short using VIX futures, they got wiped out."

He added: "It's true that the VIX and futures markets correlate almost all the time. But when they don't, it's really ugly."

There is one way Fishback sees traders profiting with ETFs based on VIX futures contracts. "If they understand what the bet is, then they can trade it intelligently," said Fishback.

That means, he adds, "realizing you're not trading something based on the VIX itself. You're trading based on current expectations of what the VIX will be at some point in the future."

So if the VIX is at 70, for example, and VIX futures are at 40 as they were last October, "you can't go short VIX futures because you think volatility has declined," noted Fishback. 

Steer Clear? 

"It's not that you can't or shouldn't use ETFs or ETNs to trade on VIX futures," he said. "But if you don't fully understand the characteristics of the underlying assets on which these funds are going to be based, you should probably steer clear. Again, VIX futures are very different vehicles than the VIX itself."

For complex commodities markets in which options aren't easily accessible, dealing in futures-based ETFs and ETNs can make sense, says Kim Arthur, chief investment officer at Main Management. One of those he points to is the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL). 

The San Francisco-based portfolio manager considers himself well-steeped in options trading and futures markets. His independent money management firm uses such strategies as overlays in portfolios for high net worth and institutional clients. 

"Options on the VIX itself are very, very liquid. So it's quite easy to trade VIX options," said Arthur. "The question then becomes why would anyone see an overriding need to trade in ETNs or ETFs based on VIX futures rather than the VIX itself?"

Both sides in the debate, however, agree that funds based on volatility benchmarks aren't something nontraders should contemplate owning.

"The long-term expected return of volatility is zero. So these indexes aren't going to be very useful for investors," said S&P's Dash. "These volatility indexes are meant to make trading on short-term fluctuations in the market available to a wider (trading) audience."

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