ETFs that follow the CBOE Volatility Index, or VIX, surged Monday as growing fears of a spreading coronavirus sent U.S. markets reeling.
On Monday, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased 7.1%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) advanced 6.8% and VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) gained 7.8% while the CBOE Volatility Index, or the so-called VIX, jumped 17.2% to 17.2 and touched its highest level since October. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.
“Markets hate uncertainty, and the coronavirus is the ultimate uncertainty in that no one knows how badly it will impact the global economy. China is the biggest driver of global growth so this couldn’t have started in a worse place. Travel in China is much more ubiquitous than it was during the SARS outbreak in 2003, making comparisons less useful. And with the markets overbought to begin with, this is now a sell first, ask questions later situation,“ Alec Young, Managing Director of Global Markets Research, FTSE Russell, said in a note.
Fueling the market fears, the coronavirus has infected over 2,700 people and killed at least 80 as health officials warned it is growing more contagious.
Volatility typically rises when stocks pullback, so owning volatility is seen as a type of market insurance. The Volatility Index, or VIX, an instrument created by the Chicago Board Options Exchange (CBOE), is a real-time market index that represents the market’s expectation of a month period of forward-looking volatility. In most cases, the higher the volatility, the riskier the security.
Derived from the price inputs of the S&P 500 index options, the VIX provides a measure of market risk and investors’ sentiments. It is also known by other names like “Fear Gauge” or “Fear Index,” as investors, research analysts and portfolio managers generally look at VIX values as a way to measure market risk, fear and stress before they take investment decisions.
Reflecting on the heightened market fears over the near-term outlook of the equity markets, VIX futures were now inverted or showed backwardation where the spot price was trading above near-term futures prices. While the VIX hit a high of 19.02 early Monday, the VIX contract that expires January 29 rose to a high of 18.1 and the contract that expires February 5 advanced to 17.5. VIX futures are almost usually in a perpetual state of contango where later-dated contracts cost more than near-term contracts.
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