Accessing VIX in the portfolio mix?
One of the most popular measures of market volatility, the CBOE Volatility Index® (VIX), is based on the market’s expectation of 30-day volatility calculated off of the pricing of near-term S&P 500 Index options. From 1990 through 2014, monthly VIX returns have had a -0.66 correlation to returns of the S&P 500 Index.1 As seen in Figure 2, the VIX had its largest upward moves during S&P 500 Index drawdowns of 10% or more. This includes the tech bubble of the early 2000s, and more recently, the financial crisis of 2008 and eurozone debt crisis of 2011.
Unfortunately for investors, volatility is merely a calculation and not an investable asset. Investors cannot invest directly in volatility — but they can access volatility indirectly through futures or options on the VIX. Better understanding how and why VIX futures work can enable an investor to more intelligently access the potential benefits of VIX futures while seeking to avoid their pitfalls.
Parts 2 and 3 of this blog series will provide more detail on VIX futures and how they can be implemented in an investment portfolio.
Figure 2
1 Source: Bloomberg L.P. from January 1990 through June 2014
Important Information
Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility was measured using the annualized standard deviation of index returns. Correlation indicates the degree to which two investments have historically moved in the same direction and magnitude. Standard deviation measures a fund’s range of total returns and identifies the spread of a fund’s short-term fluctuations.
This article was written by Invesco PowerShares Vice President, ETF Product Management, John Feyerer.