On Monday, the VIX climbed back above 21, as a number of asset classes like cryptocurrencies and stocks are falling.
Stocks and index ETFs have been pushing steadily higher, but their overall movement has been controlled, as volatility has been compressing over the last year, with the S&P 500 essentially staying within 1% in recent times.
Meanwhile, the VIX has fallen below levels not seen since before the pandemic, trading below 19, as investors champion the reopening of the economy. The move has been meaningful for ETFs like the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), which is seeing massive moves Monday.
“The S&P 500 has reached new highs while volatility has sharply declined. Low volatility has outweighed low correlations among stocks, driving return dispersion back below the long-term average,” David Kostin, Goldman Sachs chief U.S. equity strategist, said in a note Monday.
“As the U.S. moves beyond key macro events such as the 2020 election, the $1.9 trillion fiscal stimulus package, and peak economic activity, we expect three defining themes for markets will be tax reform, infrastructure, and pricing power,” Kostin added.
Recently, one or more traders laid out an approximately $40 million bet that the Cboe Volatility Index (VIX), also known as the market’s “the fear gauge,” will breach the 25 level and climb toward 40 by mid-July, trading data showed Thursday.
The VIX closed at 16.95 a little more than a week ago, its lowest close since February 20, 2020, just before the coronavirus pandemic sent investors scrambling to exit positions slammed global financial markets. Today it is at 21.15 and climbing, a gain of 24.7%.
The CBOE Volatility Index has been a reasonable prognosticator of periods of calm and crisis.
Periods where the VIX was consistently above 20 have included: the US recession of 1991, the emerging market financial crises in late 1990s, the US recession of 2001, the US recession of 2008, the European financial crisis of 2012, and most recently, the US recession of 2020.
Meanwhile, sustained periods when the Cboe Volatility Index is below 20 often correspond with prosperity or economic recovery.
It is still certainly possible the VIX will fall back below 20 and usher in additional fresh highs in the stock market. Whatever its future holds, ETF investors interested in trading the VIX have several options at their disposal.
For traders who see stocks continuing to head higher, the ProShares Short VIX ETF (SVXY) climbs as the VIX falls. According to the fund’s profile: “The investment seeks daily investment results, before fees and expenses, that correspond to one-half the inverse (-0.5x) of the performance of the S&P 500 VIX Short-Term Futures Index for a single day. The index seeks to offer exposure to market volatility through publicly traded futures markets and is designed to measure the implied volatility of the S&P 500 over 30 days in the future.”
Meanwhile, investors looking to use ETFs to trade the VIX as it moves higher over the short- or long-terms can look to the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY), along with the CBOE Volatility Index. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price. Notably, the VXX and VIXY are both up roughly 6% Monday, amid a 5.74% move higher in the underlying index.
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