VIX ETFs Climb as Fear Reaches 2008 Financial Crisis Levels

CBOE Volatility Index, or VIX, related exchange traded funds jumped Monday after another emergency interest rate cut out of the Federal Reserve failed to assuage market fears over a coronavirus outbreak.

Among the best performing non-leveraged ETFs of Monday, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased 31.3%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) advanced 31.5% and VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) gained 32.1% while the CBOE Volatility Index jumped 32.8% to 76.8, hovering around its highest level since the 2008 financial downturn. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.

“The 2008 playbook relates to how markets behave when the government appears gridlocked in the face of a crisis,” Nicholas Colas, co-founder of DataTrek Research, said in a note, according to Bloomberg. “Friday’s rally after the VIX hit 76 on Thursday shows markets are still running the 2008 Financial Crisis playbook. If that pattern holds going forward, we’re set for a week or two of further significant losses and then a genuine low after back-to-back +5% down days.”

Monday’s jump in the so-called fear index revealed traders’ extreme uncertainty over the market outlook as many try to gauge the potential impact of a spreading coronavirus on the global economy. U.S. stocks retreated so quickly that they triggered a circuit breaker for the third time in a week while the S&P 500 recorded its biggest weekly decline since the crash of Black Monday in 1987, Bloomberg reports.

“The day to day volatility is a sign that investors don’t know what to do,” David Donabedian, Chief Investment Officer of CIBC Private Wealth Management, told Barron’s. “People are casting about so the period of extraordinary volatility is probably not over.”

The VIX futures market now trades in backwardation, or with short-term prices trading above long-term contracts, reflecting growing fears of more market volatility in the short-term than further out in the future. The VIX futures traditionally trades in a contango market where long-term contracts are priced higher than the current price, which shows normal uncertainty in what will happen further out.

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