How Volatility and the VIX Interact with ETFs
September 11th at 11:02am by Tom Lydon
When talking about exchange traded funds (ETFs) and the markets, we sometimes talk about volatility. But what does that mean? One definition, according to InvestorWords.com is:
"The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility."
Gary Gordon for ETF Expert offers a simpler definition: "Volatility is how fast stock prices move." Last Friday, the Dow Jones industrial average dropped 250 points in one day–an example of high volatility. An instrument that measures volatility is the Market Volatility Index (VIX). It has an inverse relationship to stocks performance in that as stocks decline, the VIX increases. So when people see high VIX numbers they tend to panic. However, if ETF investors look closer, high volatility sometimes can indicate buying opportunities. So next time the VIX is high (and it’s currently climbing again), try to look at it objectively without fear, and it could provide a useful investing tool.
