The recent upswing in market volatility has also caused exchange traded products following CBOE Volatility Index futures to rise. An elevated VIX means investors should strap in for a rocky ride, analysts say.
The VIX, which measures implied market volatility based on S&P 500 options, dropped below 40 in Tuesday’s market rally after nearly touching 50 earlier this month.
The $1.2 billion iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) is the largest volatility-linked product. It lost about 5% on Tuesday but has spiked this summer. [Volatility ETFs Thrive]
“Markets are more fearful of financial turmoil than pretty much anything else mankind can throw at them,” said Nicholas Colas, chief market strategist at ConvergEx Group. “This means that as long as investors wonder aloud about the solvency of large American and European banks or the sustainability of the euro, it will be a bumpy ride.”
Since October 2008, the average for the VIX is 28, with a standard deviation of 13, so the volatility index isn’t “unusually high” until around 54, Colas wrote in a recent note.