VIX ETFs Thrive on Volatility and Risk Aversion
June 13th 2012 at 3:18pm by Tom Lydon
As the Eurozone woes mount, market conditions have soured and the CBOE Volatility Index, or “VIX,” spiked to this year’s high in early June. Currently, the VIX and volatility-linked exchange traded funds are popping higher as reality sets in after the brief euphoria over Spain’s bailout.
Implied equity volatility tends to move in the opposite direction to the stock market, providing a barometer for investors’ risk aversion and tradeable asset class. VIX-related ETFs allow investors to hedge against sudden downturns or take short-term directional plays.
The ProShares VIX Short-Term Futures ETF (NYSEArcac: VIXY) and the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArcac: VXX) were both up on Wednesday. [VIX ETFs to Hedge Market Volatility]
The CBOE Volatility Index rose about 8% on Wednesday to trade around 24. Historically, the average range for complacent or low market volatility is between 16 to 18.
U.S. equities markets turned Monday as skepticism over the success of Spain’s €100 billion bailout plan set in, reports Rita Nazareth for Bloomberg.
“The uncertainty remains,” John Carey, who helps oversee about $220 billion at Pioneer Investments, said in the Bloomberg article. “People are looking at the Spanish action as the first of what might be a number of steps or just a partial response to the needs of Europe’s debt crisis.”
“The Spanish deal is another Band-Aid,” Matt McCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc., said “Many investors are viewing this with skepticism. The problem is not going to be fixed by this amount. It’s not a solution, and people know the difference. Expect more volatility not less.”
The VIX shot up to 27.7 during intra-day trading on June 4, the highest it has been so far this year.
ProShares VIX Short-Term Futures ETF
For more information on market volatility, visit our volatility 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.
