Basic Points

• Volatility ETF products use rotations of front and back month volatility futures (VX) so that they can maintain continued exposure to volatility contracts as the present ones continue to expire. 
• Since volatility ETFs gradually rotate weight from the front to back months, they reliably bleed value from the standard [contango shape] of the [term structure], which based on how longer-dated contracts tend to have higher prices. 
• In other words, the [volatility] ETF issuers keep selling something less expensive to buy something more expensive—just to keep their ETF (a basket of investment products tradable like a single stock) rolling structurally.

This makes volatility ETFs logical candidates for bearish positions, all else equal, but with defined risk such as with stop losses and call wingtips. 

These volatility ETFs can easily melt up just on account of breaking structurally, such as in Volmageddon events or even if we simply get a moderately strong supply/demand crisis in the volatility complex. It is important to know how the current holdings are weighted if you are going to use any kind of size with trading these, since their tail risk can be unpredictable and violent, and their contango penalty can be severe if heavy front-to-back rotations are still pending. 

<UVXY holdings retrieved from Proshares>

Above is an example of the Feb 9, 2023, holdings for UVXY. This is a popular volatility ETF with a mandate to try and reproduce the daily performance objective of 1.5x the performance of VX futures. What can be seen in this example is how the front/back month distribution is highly imbalanced (with about 22% weighting on the front month and 128% weighting on the back month)! However, it can also get quite even on that same distribution with these. Such discrepancies are useful to know, especially if the front and back VX contracts have a steep term structure. A steeper term structure would be a bearish flow for this ETF, and it would be even stronger if it has not yet rolled a heavy weighting on the back month, since that would mean it has not yet taken a hit from the typical contango of term structure.