As the earnings season goes into full swing, many have anticipated lackluster first quarter results, which could unhinge the recent market recovery off the February lows. Consequently, traders may consider small positions in CBOE Volatility Index, or VIX, related exchange traded products to hedge their long positions.
The CBOE Volatility Index was hovering around 13.7 at Thursday’s close, near its lowest level this year and below its historical average of between 15 and 20, as investment anxiety dissipated with U.S. equities moving back toward all-time highs.
However, we are still in the midst of a so-called earnings recession in the S&P 500, with FactSet anticipating the benchmark index to show an earnings decline of -9.1% for Q1 2016 and S&P Global Market Intelligence also projecting S&P 500 Q1 EPS to decline 7.5% year-over-year.
Consequently, investors who are wary of potential headaches in the weeks ahead can hedge against a complacent market with the VIX. The VIX is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index.
Exchange traded products that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns. Nevertheless, investors should keep in mind that the majority of VIX ETPs are designed to track CBOE Volatility Index futures contracts, not the VIX spot price, so the VIX ETPs may not perfectly reflect VIX spot price changes.
For example, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) are among the largest VIX-related ETP options available to ETF investors.