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What Does Extremely Low VIX Say About ETF Investing?

Sanghamitra Saha

On Friday, the broader market gave two mixed signals. The CBOE Volatility Index (VIX), the market's fear gauge, plunged to its lowest level since 1993 on the day. Soon after that a brutal sell-off in the leading tech stocks swept the broader market. Following this, the VIX gathered steam and gained about 5.3% for the day (read: Market Fears Flare Up: Volatility ETFs on Edge).

iPath S&P 500 VIX ST Futures ETN VXX – a popular ETN option providing exposure to volatility – saw almost double the average trading volume on June 9, 2017. VXX added about 1.4% on June12. However, even with this gain, VXX hovered around the 52-week low price, which about 80% below its 52-week high price.

Apart from relatively benign VIX, financial stocks soared on Friday, subduing the harsh impact of tech stocks on the broader market. Financial Select Sector SPDR ETF XLF gained about 1.9% on June 9 on rise in bond yields.

Does This Mean Complacency in Investor Sentiment?

Timothy Graf, head of macro strategy EMEA for State Street Global Markets, believes “that despite the low VIX index, investor sentiment is neither complacent nor overly optimistic and doesn’t see a correction in the short-term.”

After all, this time, both the U.S. market and the global market are in decent shape, with improving economies and rebounding corporate earnings. The World Bank has also testified to it. The bank has kept its forecast for global growth in 2017 and 2018 the same at 2.7% and 2.9%, respectively. If attained, the global economy will score a seven-year high growth rate next year.

The U.S. economy is estimated to expand 2.1% this year, 0.1 percentage point lower than the World Bank's forecast in January. This marked a substantial gain from 2016's 1.6% growth.

As far as the latest sell-off in tech stocks is concerned, it probably stemmed from stretched valuation. As per the source, “the last time the VIX hit a low, on May 9, the fear gauge nearly doubled by May 18, with major market averages suffering a sharp drop on May 17, and leaders such as Apple and Facebook also taking hits and bank stocks tumbling. Of course, that market fear faded quickly, and stocks have sprinted to new highs.”

So, with upbeat global fundamentals, we can expect the stocks to move higher in the near term. However, practicing a little more value right now would be wise given the emergence of tech volatility.

Under such circumstances, we would like to point out the ETFs that not only gained on the fearful Friday, but also hit a 52-week high and are poised to outperform ahead.

Cambria Value and Momentum ETF VAMO

The fund looks to take a quantitative approach to actively manage a portfolio of U.S. equities. Value, momentum and tactical hedging are the three factors taken into consideration before picking stocks. The fund charges 59 bps in fees. The fund was up about 2.2% on June 9, 2017.

First Trust Dow Jones Select MicroCap Index Fund FDM

The underlying index of the fund – the Dow Jones Select Microcap Index – represents microcap stocks that are relatively liquid and have strong fundamentals relative to the microcap segment overall. The fund is heavy on the financial sector and charges 60 bps in fees. The fund was up 1.9% on June 9, 2017 (read: Behind the Incredible 5-Year Run of Small Cap ETFs).

Fundamental Pure Small Value PowerShares PXSV

The  index of the fund – Russell 2000 Pure Value Index – consists of stocks with strong value characteristics selected from the Russell 2000 Index. This fund was also heavy on financials. PXSV added about 1.8% on June 9, 2017. The fund was up 1.8% on June 9, 2017.

Proshares S&P 500 Dividend Aristocrats ETF NOBL

The S&P 500 Dividend Aristocrats Index targets companies from the S&P 500 that have raised dividend payments each year for at least 25 years. It charges 35 bps in fees and added over 1% on June 9 (read: An Investor's Guide to Dividend Aristocrat ETFs).

S&P Midcap 400 Value ETF Vanguard (IVOV

The S&P MidCap 400 Value Index looks to track the performance of value stocks of medium-size U.S. companies. The fund charges 20 bps in fees and added over 1% on June 9.

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