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Investors Gearing Up for Volatility, Turn to VIX ETFs


Despite the lingering geopolitical uncertainty induced by the crisis in the Crimea peninsula, CBOE Volatility Index-linked exchange traded funds are still reflecting a relatively complacent market. However, investors have been quietly funneling money into the VIX funds.

The so-called VIX, or “fear” gauge, shows the market’s expectations of volatility and is widely used as a measure of market risk. The VIX is comprised of options contracts on the S&P 500.

The index has a long-term average reading of about 20 – readings above 20 are said to reflect volatile market conditions, whereas readings below 20 mirror complacent conditions. Consequently, the VIX and the broader stock market tend to move in opposite directions as investors expect less volatility in a trending bull market.

Currently, the VIX hovers around 14.5, which is near its average over the past 200 days, writes Chris Dieterich for the Wall Street Journal.

In February, after the VIX reached a high of 21.44 and the S&P 500 dipped to its 2014 low, the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) briefly surpassed iPath S&P 500 VIX Short-Term Futures ETN (VXX) in assets. [A New King Among Volatility ETNs]

However, the trend has since reversed as investors anticipate rising volatility. Since Feb. 7, VXX, which tries to reflect the price movements of VIX futures, has attracted $280 million in assets, whereas XIV, which takes the inverse or -100% price movement on VIX futures, saw $149 million in outflows.

“With not much economic news to move the markets this week, news stories such as Ukraine will have the potential to make the market volatile in the near term,” Paul Weisbruch, vice president of ETF and options trading at Street One Financial, said in the article.

iPath S&P 500 VIX Short-Term Futures ETN

For more information on the CBOE Volatility Index, visit our VIX category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.