The CBOE Volatility Index reveals a complacent market while the rally in equities has stretched valuations. For those who are wary about a swing in the market, consider hedging your position with VIX-related exchange traded funds.
BlackRock’s Chief Investment Strategist Russ Koesterich argues that price swings are likely to return, given the VIX is hovering near its record low this month and valuations are “stretched across markets,” reports Mary Childs for Bloomberg.
The VIX typically moves higher when stocks plunge. Investors would turn to S&P 500 options to protect their portfolios against any sudden dips.
The volatility index is sitting around a 11.5 and briefly touched 10.6, a seven year low, last week. Historically, the VIX has averaged around the 15 to 20 level. [VIX ETFs Reveal a Complacent Market]
Meanwhile, the S&P 500 index has gained 6.0% year-to-date and now shows a price-to-earnings ratio of 17.0. The index has not increased or declined over 1% in 48 sessions, the longest streak since 1995.
“Volatility is cheap,” Koesterich said in the article. While supportive global central banks policies has dampened volatility, “it’s not clear it should be this low,” he said.
Hedge funds have already increased bets on volatility. In listed contracts, demand for protection against a dip in the markets has sent the price on bearish puts to a 15-year high relative to calls.
BlackRock argues that a any changes to the Fed’s zero-interest rate policy could fuel volatility.