The equities market has remained surprisingly calm this year, fueling a complacent trading environment and burning investors who have been betting on CBOE Volatility Index-related exchange traded funds.
Year-to-date, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) both declined about 34.4%.
However, skeptical investors have been slowly adding onto their VIX hedges in anticipation of an eventual violent turn, despite the low volatility experienced this year. Year-to-date, VXX has attracted $598.1 million in net inflows and VIXY saw $92.9 million in net inflows, according to ETF.com.
As the S&P 500 slowly hit new record highs, the benchmark index has not experienced large oscillations of over 2% this year, compared to three such swings by this time of the year in 2014 and two in 2013, reports Saumya Vaishampayan for the Wall Street Journal.
Consequently, the VIX, or so-called fear gauge, has been dipping to near record lows and is currently hovering around 12.7. The Volatility Index, which is based on prices of S&P 500 options, has not closed above its 10-year average of 20 since January 30 when volatility in the foreign exchange and energy market upended U.S. equities.
“It wasn’t that long ago that, on the low side, you’d see 17 [for the VIX], and on the high side you’d see 25, in a range-bound market,” Ron Egalka, president and chief investment officer of Rampart Investment Management, said in the WSJ article, warning that the VIX will stay low if the bull market pushes ahead.
Many market observers are now expecting the stock market to continue its lethargic march upward, spotted with periods of muted swings as the U.S. economy expands at a slow enough pace that will not warrant an immediate interest rate hike from the Federal Reserve.
Additionally, the loose monetary policies abroad, notably in the Eurozone, could help add onto the U.S. rally. Oil prices have also somewhat rebounded, which should help strengthen a battered energy sector.
Nevertheless, George Hashbarger Jr., a portfolio manager at BPV Capital Management, warned that volatility could spike later in the year if the Fed makes changes to its monetary policy.
“When the interest-rate increase gets closer, there will be fears of that again,” Hashbarger said.
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.