One of the most popular tools used to measure the market volatility of stocks and exchange traded funds (ETFs) is the VIX. Over the past few weeks, the VIX has been declining indicating that volatility in the markets is starting to calm down, so what does this mean for investors? Historically speaking, the VIX has been a measure of uncertainty or investor anxiety. High levels of fear in investors can be reflected by high VIX levels and low levels indicate widespread complacency. To see the effect the VIX has on returns, CNBC gives the following statistics:
- When the VIX is below 15, the S&P’s annualized return is 7.8%
- When the VIX is between 15 and 20, the S&P’s annualized return is 2.8%
- When the VIX is between 20 and and 25, the S&P’s annualized return is -1.5%
- When the VIX is over 25, the S&P’s annualized return is 11.1%.
As for what the future lies for investors, your guess is as good as ours. Reasons that volatility has softened include bank stress test results have already been disclosed, unemployment numbers have already skyrocketed and are unlikely to jump in huge increments anytime soon and corporate valuations have already been demolished, so there isn’t much more room to drop, states Bill Luby at Vix and More.
However, no one really expected the current global financial meltdown to be as severe as it is, and no one can be sure that it is completely over. Predicting what lies ahead is kind of playing Russian Roulette, you really don’t know what is going to happen.
If interested in being volatile, there are definitely ways to cure your fix. One can take a look at the following ETNs:
- iPath S&P 500 VIX Short-Term Futures (VXX)
- iPath S&P 500 VIX Mid-Term Futures (VXZ)
When considering the aforementioned ETNs, it is imperative to know exactly how they work. They don’t track the VIX, what they do is track a basket of volatility futures and produce a negative return where the yield on the cash that serves as collateral for the futures softens the blow.
Remember to always have a strategy, know what your portfolio consist of and know exactly how your holdings work. ETNs and ETFs differ in their construction, as well.
Kevin Grewal 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.