Could A More Significant Volatility Breakout Be Underway? | ETF Trends

In a market that has been steadily climbing despite impeachment proceedings against President Trump, a roller-coaster ride due to tariffs and a trade war with China, and generalized global uncertainty, volatility has become relatively complacent.

The VIX or CBOE Volatility Index, which is commonly referred to as the “fear gauage”, and is used by many traders and analysts as a measure of how carefree investors are, has been moving toward 12, and bouncing back up, causing periodic disruptions to stocks in this long running bull market since November. Since last week the VIX has bounced 32%, corresponding to a drop in stocks, as investors express concern over the Chinese coronavirus, which shows new cases daily.

Friday is a good example of this effect, with stocks and oil plummeting as the VIX spikes higher.

On top of the coronavirus fears, Ed Tilly, the chief executive officer of Cboe Global Markets Inc. noted at a luncheon in New York on Thursday, that there is elevated demand for protection around important dates in the primary campaign and general vote showing up in the term structure of implied volatility, which also is reflected in the VIX.

In 30 years at the premier U.S. options exchange, Tilly said he has yet to see an election with more anxiety than the 2020 presidential race.

“The demand for hedging and hedging vehicles is really amazing,” Tilly explained. It’s “unprecedented” this early in an election cycle.

Open interest in the October VIX 2020 futures contract has surged since Jan. 8 to reach 5,866. By Super Tuesday in 2016, the October contract’s open interest was below 400.

Investors who are wary of a VIX breakout could look into alternative asset allocations such as bond ETFs like the iShares iBoxx Investment Grade Corporate Bond ETF (LQD) or a gold ETF like the SPDR Gold MiniShares (NYSEArca: GLDM) and SPDR Gold Shares (NYSEArca: GLD). 

However, those who believe the VIX will continue to languish or move lower could explore an ETF such as the ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY), which tracks one-half the inverse (-0.5x) of the daily performance of VIX futures. Alternatively, they could continue to be long stocks with an ETF like the Invesco QQQ Trust (QQQ) for equity exposure, or the SPDR S&P Pharmaceuticals ETF (XPH), as healthcare has been a top-performing sector.

For more market news and updates, visit