The CBOE Volatility Index-related exchange traded funds are breaking down to new lows, with the VIX hitting its lowest in over a year, reflecting an increasingly complacent equities market.
Over the past three months, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) fell 35.6%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) decreased 35.6%, VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) dropped 35.5% and REX VolMAXX Long VIX Weekly Futures Strategy ETF (BATS: VMAX) decreased 44.3%.
The VIX is now hovering at 11.34 after slipping to as low as 10.93 in early morning trading, its lowest intraday level since August 2015.
Meanwhile, the SPDR S&P 500 ETF (NYSEArca: SPY), Vanguard 500 Index (NYSEArca: VOO) and iShares Core S&P 500 ETF (NYSEArca: IVV) have increased 6.7% over the past three months, mirroring the new highs in the S&P 500 benchmark.
The VIX, or so-called fear index, 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. ETPs that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns. VIX exchange traded products track the VIX futures market, not the VIX spot price.
As the S&P 500 continued to break new ground, the cost of the stock-market protection has quickly declined. Analysts now argue that the most recent dip in the VIX partly reflects the lack of potential market-moving events in the coming months that could shake the market rally, reports Ben Eisen for the Wall Street Journal.
“You’ve got a very quiet period,” Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, told the WSJ, pointing to holidays over the next month and the many traders who are taking vacations. “I think everyone is in standby mode.”
However, other market observers warn that investors are getting complacent and mis-pricing risks. Negative events can quickly stir markets during periods of low trading volume. On Monday and Tuesday, total composite stock trading volumes were each less than 85% of their year-to-date daily average.
The difference between the VIX future expiring in one month from now and the future contract expiring in six months is at its highest level of the year, revealing investors rising demand for protection in the months ahead.
For more information on the CBOE Volatility Index, visit our VIX category.