Now that market volatility is swinging back, investors can hedge against wild market oscillations with exchange traded funds that follow the CBOE Volatility Index, or VIX.
With the VIX ended Friday at 20.9, slightly above its long-term average, equity investors can utilize VIX-related exchange traded products like the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), a VIX-related exchange traded note, and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) to track market volatility. Over the past month, VXX has increased 16.5% and VIXY gained 16.7%. [VIX ETFs Capitalize on Increased Market Concerns]
However, if the markets turn more complacent, traders can also capitalize on the calmer conditions with inverse VIX offerings, such as the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV) and ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY). Over the past three months, XIV has declined 22.7% and SVXY fell 22.9%.
The VIX typically moves higher when stocks plunge. Traders would turn to S&P 500 options to protect their portfolios against any sudden dips. Investors should also be aware that VIX-related ETFs are designed to track CBOE Volatility Index futures contracts, not the VIX spot price. Consequently, traders can lose money on this trade when longer-dated contracts are more expensive than the front-month contract, or when markets are said to be in “contango.”
However, given the more uncertain market outlook, volatility could continue to linger. Historically, October has been the most volatile month for stocks, reports William Watts for MarketWatch.
Additionally, David Kotok, chairman and chief investment officer at Cumberland Advisors, argues that the markets are transitioning into a phase of “newer normal” where investors have to weigh the potential negative effects of exiting a half-decade era of low volatility attributed to ultra-loose monetary policies from global central banks.