U.S. equities have been oscillating, but CBOE Volatility Index and VIX-related exchange traded funds investors have been growing increasingly complacent.
So far this year, the S&P 500 chart reveals a market with plenty of tops, bottoms and in-betweens, and at times, a 6.3% difference between the index’s intraday highs and lows, reports Jeff Fox for CNBC.
However, investors are not hedging against the volatility. Specifically, the widely observed CBOE Volatility Index, or so-called fear gauge, has declined 31% year-to-date and now hovers around 12.7.
Year-to-date, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) decreased 31.7% and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) fell 31.8%.
During normal conditions, a falling VIX would reflect increased confidence and strengthening in the equities market, and vice versa. However, despite the swings, the relatively flat market this year has pressured the VIX.
“Something is wrong here,” Nick Colas, chief market strategist at Convergex, wrote in a note. “Now, apparently, we have a ‘volatility trap’: a situation where options players are deeply reluctant to pay too much for volatility protection, despite historically cheap pricing for downside hedging in listed options.”
The sideways trading has kept investors from using the VIX hedge. The most recent American Association of Individual Investors gauge reveals a “neutral” sentiment, indicating no strong opinion on where the S&P 500 will be over the next six months. After a multi-year rally, investors are beginning to shy away from large-cap stocks, turning to other asset categories and overseas equities to capture potential opportunities.
Alternatively, if the S&P 500 keeps plodding along and traders remain complacent, ETF traders can capitalize on the decline in volatility through inverse VIX options, like the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV) and ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY). Year-to-date, XIV jumped 30.7% and SVXY surged 30.5%.
iPath S&P 500 VIX Short Term Futures ETN
For more information on the CBOE Volatility Index, visit our VIX category.
Max Chen contributed to this article.