As oil prices have fallen, many investors with exposure to energy companies have wisely kept an eye on VIX. But there is another volatility benchmark – one more suited to energy equity investments – which investors should also watch carefully: VXXLE.

VXXLE is the ticker for the CBOE Energy Sector ETF Volatility Index. This index has same methodology as VIX. However, instead of tracking S&P 500 options, it is based on options tied to the Energy Select Sector SPDR® Fund, a popular ETF known by its ticker, XLE.

VXXLE measures the 30-day implied volatility of XLE and by extension, the index it follows, the S&P Energy Select Sector Index. Just as VIX is inversely correlated to the S&P 500, VXXLE is inversely correlated to XLE, as the chart below shows (3-year correlation = -0.66).

vxxle

Even though CBOE does not yet offer derivatives based on VXXLE, this index still has great value as a benchmark, particularly when coupled with other related information. As an example, some analysts compare the changing value of a volatility index with the price-to-earnings ratio of the companies in the underlying index.

pe

Analysts say that when such a ratio is high, the market may be complacent and a prudent investor might want to scale back their exposure. On the other hand, if this ratio moves to a lower range – indicating prices are relatively low and anxiety is high – a “crash” may be under way and there could be an opportunity to take a contrarian position.

In the case of VXXLE, this ratio has moved drastically over the past year. As the chart above shows, this ratio has gone from its 3-year high to a record low. And in line with this, the S&P Energy Select Sector Index has tumbled, at one point losing approximately 25% of its value.

If you want to use VXXLE to inform your investment decisions, you can access more information on Chicago Board Options Exchange’s website. Also, a tutorial on VIX’s methodology, which VXXLE shares, can be found here.

*Author’s note: Due to data limitations, the second chart uses the P/E for the S&P 500 Energy Sector Index instead of the S&P Energy Select Sector Index. These indices share the same constituents but use different weighting schemes.

This article was written by Reid Steadman, managing director, non-equity indices, S&P Dow Jones Indices.

© S&P Dow Jones Indices LLC 2013. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to SPDJI. This material is reproduced with the prior written consent of SPDJI. For more information on SPDJI, visit http://www.spdji.com.

Post Comment

Do NOT follow this link or you will be banned from the site!