VIX exchange traded funds (ETFs) and exchange traded notes (ETNs) are once again part of the conversation as conflicts in Libya and the broader Middle East intensify.
The VIX – otherwise known as the market’s “fear gauge” – jumped to their highest point all year today. The index is a measure of how scared investors are feeling, so when it jumps on days like today, there’s some nail-biting going on.
The index has an inverse relationship to the markets, meaning that it tends to rise when stocks decline. So when the markets declined yesterday and today, the VIX went soaring as much as 30%, says The Wall Street Journal.
Understanding VIX Products
The jump has re-ignited interest in VIX-tracking products, though many investors may not fully understand how they work.
Randy Warren, chief investment officer at Warren Financial Service, points out that the funds are designed for individual investors. But not just any individual investor: the kind who has the time to monitor the funds every day, has a firm grasp of how they work and doesn’t intend to buy-and-hold them.
“You have to decide when to be in and when to be out,” Warren says. That’s because the funds, like all leveraged and inverse ETFs, have the potential to be volatile in very short periods of time.
It’s also important to have at least a basic understanding of futures and options. Like commodity ETFs, VIX futures can be in contango, which is when the spot price is lower than the futures price. In that situation, when current contracts are sold and new and more expensive ones are purchased, it can result in a loss.
It all comes down to educating yourself.