The CBOE Volatility Index , often called the Fear Index and most frequently called the VIX Index, became a focus last week. After trading near a three-year low a week ago, the index spiked from 14.27 per cent to 18.39 per cent, a 29 per cent gain. The spike last week implies growing investor uncertainty in North American equity markets.
The Index measures the implied volatility of S&P 500 call options. When investors lose confidence in equity markets, equity markets move lower and implied volatilities on S&P 500 Index call options increase. Experienced investors and hedge fund managers frequently own VIX exchange traded funds and notes as a hedge against a stock market correction. An investment in VIX products is not for the faint-of-heart. Daily gains or losses of 5 per cent frequently happen.
Ten exchange traded funds and exchange traded notes currently trade on North American exchanges. Some are more liquid than others. Each has unique characteristics.
By far the most liquid security is iPath S&P 500 VIX Short-Term Futures ETN . The ETN offers exposure to a daily rolling long position in the first and second month VIX futures contract.
The second most liquid security is iPath S&P 500 VIX Mid-Term Futures ETN . The ETFN offers exposure to a daily rolling long position in the fourth, fifth, sixth and seventh month VIX futures contacts.
Other U.S. listed ETNs are less liquid, but may be suitable for investors and traders looking for specific investment requirements. Selections include iPath Inverse January 2021 S&P 500 VIX Short-Term Futures ETN , iPath Inverse S&P 500 VIX Short-Term Futures ETN , iPath Long Enhanced (2X) S&P 500 VIX Mid-Term Futures ETN , ProShares VIX Mid-Term Futures ETF , ProShares VIX Short-Term ETF and UBS E-TRACS Daily Long-Short VIX ETN . Please check terms for selections before investing.
Two exchange traded funds trade on the Toronto Exchange. Horizons offers the Horizons BetaPro S&P 500 VIX Short-Term Futures ETF . Units are hedged against U.S. Dollar currency risk. Horizons also offers a leveraged version. The Horizons BetaPro S&P 500 Short Term Futures Bull Plus ETF offers two times the performance of the daily upside move by the Index.
The VIX Index has strong seasonal characteristics. Its period of seasonal strength is from the end of June to the first week in October. U.S. equity markets have a history of greater volatility during the summer time.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow him on Twitter @EquityClock.