CBOE Volatility Index-related ETFs jumped Monday, with the VIX trading at its highest level in five months, as U.S. equities pulled back and yields on benchmark Treasuries rose to their highest level in over three years.
On Monday, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) rose 4.2%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) gained 4.2%, VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) increased 3.9% and REX VolMAXX Long VIX Weekly Futures Strategy ETF (BATS: VMAX) advanced 8.4%. Meanwhile, the VIX jumped 14.1%.
U.S. equities have experienced one of their best starts to a new year as the the rally maintained its momentum after a solid 2017. The S&P 500 has added 7.5% in January, its best start since 1987, on strong corporate earnings, improving economic growth and a rising yields that triggered rotation out of bonds and into stocks, the Wall Street Journal reports.
However, the recent gains have added to concerns over equity valuations in an aging bull market.
“For the first time in this recovery, the stock market has finally become expensive based on its ‘new valuation range,’” Jim Paulsen, chief investment strategist at Leuthold Group, said in a note to clients, referring to that record-high price-to-earnings multiple.
“Most valuation parameters are either the richest ever or among the highest in history,” Howard Marks, co-founder of Oaktree Capital Management, told the WSJ. “In the past, levels like these were followed by downturns. Thus a decision to invest today has to rely on the belief that ‘it’s different this time.'”
Given the heightened valuation and the recent run up in equities, investors may be betting on the historically low VIX as an indicator that volatility will accelerate ahead.
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.
For more information on the CBOE Volatility Index, visit our VIX category.