Exchange traded funds that track futures contracts based on the CBOE Volatility Index, or VIX, are reflecting a tick in market fear as the S&P 500 undergoes a slow sell-off from its historic high.
The iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) was relatively flat Friday after surging 5.3% Thursday. The exchange traded note is up for the second straight week, gaining 7.1%. VXX was on a six-week down streak before that as the market drifted higher.
VXX declined 33.5% from its June 24 high as the S&P 500 surged over its 1,700 for the first time early August.
Currently, the VIX was hovering around 14.4 – the index has an historic average of around 20.
The VIX, or so-called fear index, has an inverse relationship with the S&P 500 index – as one goes up, the other typically falls.
The current low VIX can be taken as a sign of investor complacency, whereas a high reading reflects greater investor fears.
William L . Watts for MarketWatch points out that a reading well below 20 has been viewed as relatively tame or indicates that investors have become too relaxed. On the flip side, a reading above 30 signals lots of fear and uncertainty.
“VXX has great potential as a short-term hedge against unforeseen tumult,” according to Morningstar analyst John Gabriel. “But how you buy into volatility matters just as much as the price. Because buying VXX is equivalent to buying futures contracts that frequently trade in contango, holding VXX during a period of peaceful markets will subject investors to significant losses even if the spot VIX holds steady.”
iPath S&P 500 VIX Short-Term Futures ETN
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.