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Investors are anticipating increased volatility in equity markets

Aniket Ullal of First Bridge Data

First Bridge ETF landscape and risk report: January 2014 (Part 2 of 7)

(Continued from Part 1)

Risk environment

Investors appear to be anticipating increased volatility in the equity market, as indicated by the rapid increase in the CBOE VIX Index in January. The chart below shows the VIX Index from the beginning of this calendar year, through February 3, 2014.

Even though investors appear to anticipate increased volatility over the next 30 days, it is important to note that at a value of 20, the VIX is still in “normal” territory relative to its historical average over the last ten years (Median—17; Mean—20). However, this could certainly change, particularly with the current concerns regarding emerging markets as the Fed continues its taper program. The chart below shows the VIX Index over the last ten years.

In the past, investors (particularly retail investors) have often reacted to equity market volatility by moving into cash and bonds. Several independent studies such as the QAIB report from Dalbar show that poor market timing by retail investors during periods of uncertainty results in lower long-term returns. With the expansion in the ETF universe, investors now have more options for managing their exposure.

Continue to Part 3

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