Don’t Get Overzealous with Your VIX ETF Exposure
July 27th 2012 at 9:30am by Tom Lydon
The high market volatility associated with the steep market losses in recent years is still fresh and deeply imbedded in the psyches of today’s investors, and many are betting on VIX futures and related exchange traded funds to hedge against the risk. However, the markets are moving away from the extreme swings.
While nothing is certain and we will experience some bouts of volatility, Ryan Detrick, Senior Technical Strategist at Schaeffer’s Investment Research, argues that we won’t have a repeat of last year’s swings, but as record open interest in CBOE Volatility Index futures suggests, people are still betting on high volatility, reports Matt Nesto for Breakout. [ETF Chart of the Day: Volatility]
“There will be pullbacks and lots of scary headlines, but by no means do we expect a major sell-off,” Detrick said. “The bottom line is everyone has it wrong because there’s just so much fear out there.”
Detrick noted that the long-term, historical trends in the VIX point to diminishing volatility.
“[Historical volatility] is down 80% since the financial crisis [in 2008] and down 50% since last summer,” Detrick added. “We think the crowd could definitely have it wrong and volatility could slowly continue to trickle lower.”
While the recent Eurozone drama helped send the VIX higher as stocks dropped, this is only a short-term move. [VIX ETFs Capitalize on the Eurozone Fears]
“We think [the VIX] can continue to work lower and into the low teens,” Detrick said.
Investors who are interested in making a short-term hedge against market volatility can take a look at VIX-related funds, like the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) and the ProShares VIX Mid-Term Futures ETF (NYSEArca: VIXM).
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.