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Market Volatility Ahead? What to Know About the Cboe VIX

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What You Need to Know

  • The Cboe Volatility Index (VIX) is seen as an indicator of near-term stock market volatility.
  • Exchange-traded products based on the VIX are not suited to long-term investing.

We hear about the Cboe Volatility Index, better known as the VIX, quite a bit in the financial media and on cable financial news programs. What is the VIX, and how might it affect what you do as an advisor investing your client’s assets in the face of continued market volatility?

What is the Cboe Volatility Index?

The Cboe Volatility Index, known as the VIX, is an index that tracks the near-term volatility of the S&P 500 index in real time. The VIX is run by the Chicago Board Options Exchange, or Cboe. The VIX is an index, not a tradable security. There are several VIX ETFs and ETNs that track the index. There are also futures and options on the VIX that can be traded as well.

The VIX is derived from the price of S&P 500 index options with near-term expiration dates. The VIX produces a 30-day forward-looking projection of the volatility of the index.  

The VIX is a tool that investors use to gauge expectations of stock market volatility and investor sentiment over the next 30 days. The VIX is sometimes known as the fear index as traders and investors use the VIX to assess the level of fear and uncertainty inherent in the stock market.

What is the inverted VIX?

A chart of the VIX is usually an upsloping chart with longer dated futures contracts on the VIX trading at higher levels than those with a shorter-term maturity. In an inverted VIX situation, the spot price of the VIX futures would trade at a higher price than the three- and six-month futures.

The inverted VIX is taken to be a bullish sign of a market bottom by many experts. There have been several occurrences of the inverted VIX curve over the past year, and all of them coincided with market bottoms.

What are the highest VIX levels to date? 

Aa of Feb, 2,  the 52-week intraday high for the VIX index was 38.94. The 5- week intraday low was 14.10. Throughout most of its history dating back to 1993, the index has tracked in a range from 10 to 30. 

In this context, the highest level the VIX has reached to date was 82.69 on March 16, 2020. This surpassed the previous high of 80.74 set on Nov. 21, 2008, at the height of the financial crisis. 

On March 16, 2020, the S&P 500 closed just below 2,305, just shy of its low point during the market decline at the outset of the pandemic. After that, the S&P staged a nice gain though the end of 2020 and through 2021, reaching a number of highs. 

Is VIX a leading or lagging indicator?

The VIX is a forward-looking index. It is a leading indicator of the potential risk inherent in the S&P 500, and by proxy in the stock market. It is also a leading indicator of the level of fear that investors and traders have toward the market in the near term. 

How much weight should the VIX have on investment decisions?

For advisors and investors whose time horizon is long term, the VIX probably shouldn’t carry too much weight in your investment decisions. For a client whose main goal is retirement in 20 years, where the VIX stands today or even next year seems pretty irrelevant. 

For investors looking to make portfolio adjustments in the near term, looking at volatility expectations might play a role in the timing of some of their moves. It’s important to realize that the VIX is just an indicator. Things can and do change quickly in markets, so relying on any one piece of data or indicator can be dangerous for investors. 

How have VIX ETPs done?

There are a number of exchange-traded products that look to track the VIX but actually invest in VIX futures contracts. This exposes investors not only to the movements of the index, but also to any factors affecting the futures contracts.

In a recent ThinkAdvisor article, Morningstar’s Ben Johnson said: “VIX-linked ETPs have effectively destroyed $12.4 billion in capital during nearly 12 years since they debuted. Investors should steer clear.”

If we look at the training returns of four popular ETPs, we see a lot of variations in returns:

VIX ETF Returns, Jan. 31, 2022. Source: Morningstar (Source: Morningstar)

Looking at this another way, according to a chart on the ProShares website, $10,000 invested in VIXY and VIXM on Jan. 3, 2011, in each case would now be worth the following as of the close on Feb. 1, 2022: 

  • VIXY $5.06.
  • VIXM $925.49.

Looking at some other VIX-related ETPs also shows volatility over time. These products seem best suited to short-term trading rather than long-term investing. As an advisor, it is up to you to determine if these products have a place in your client’s investment strategy.

The VIX is an interesting indicator to watch. For most advisors and clients who invest on a longer-term basis, it might not be the most relevant market benchmark on which to base future investment decisions, at least not by itself. 

(Image: Chris Nicholls/ALM, Adobe Stock)

Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.


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