Does the VIX Volatility Indicator Still Matter?

As financial advisors ponder the answer, these VIX-based ETFs may prove the gauge still matters.

Reviewed by: Staff
Edited by: Ron Day

The CBOE Market Volatility Index, or VIX, has been relied on by traders, investors, and investment advisors since it's 1993 debut.

VIX futures contracts were added in 2004. Since that time, the VIX has been synonymous with market sentiment, in that when it lays low, it typically indicates a calm market that is either rising or at least not skittish and falling. And when VIX spikes above 20, then 30 or even north of 60 on occasion, that has synched up with market dips, dives, and crashes over the past few decades. 

But markets don’t work like they used to. New “players” such as algorithmic traders, high-frequency trading, and even the emergence of the retail investor, both as meme stock devotees and others, have changed the game. And of course, there is indexing and the explosion of popularity of ETFs, growing the trillions each year. So, is the VIX still useful in this modern market environment, and are VIX-linked ETFs still viable candidates for advisors to try to incorporate into the portfolios they build for clients?

There is a good argument that the VIX is currently reflecting the confident mood of the market, having remained under the 15 level for nearly all the past five months’ stock market run-up. And, just before that remarkable rally, VIX briefly popped above 20, and peaked at 30 just one year ago, when stocks were still trying to shake off 2022’s horrendous year. 

Bottom-line: the VIX appears to be doing what it always does. That means advisors can use it as a portfolio hedge, to exploit a continued calm market, or even as a substitute for using options, which are not easy to arrange for all clients.

Getting VIX in the Mix With Volatility ETFs 

The $788 million Simplify Volatility Premium ETF (SVOL) is the one of the newer funds that targets volatility as a portfolio enhancement tool, and since it's 2021 debut it's grown to be the largest. 

SVOL is actively managed and takes a quirky yet effective approach which produces an annualized yield of close to or above 10%. The fund also utilizes an option overlay strategy to protect against adverse moves in VIX, effectively using the volatility of volatility to capture about one-quarter of the inverse of the VIX. 

In other words, it adds income to portfolios in flat and up stock markets, and that high income serves as a partial buffer during weak stock markets. 

VIXY, SVXY: Turn a Small Holding Bigger

Then there are a pair of ETFs that offer more direct access to a rising or falling VIX. The numbers speak for themselves. The $157 million ProShares VIX Short-Term Futures ETF (VIXY) and the $306 million ProShares Short VIX Short-Term Futures ETF (SVXY) work opposite ends of the VIX, long and short, respectively. SVXY has gained 83% in the past 12 months, while VIXY is off 73%. And in a sharp swing to the south for the S&P 500, and thus up for the VIX, that would likely be the opposite. 

If that sounds like too much excitement, keep in mind that these funds are designed for short-term holding periods. But as alluded to earlier, their return profiles could be thought of as surrogates for put options (VIXY) and call options (SVXY) on the S&P 500, where a very small position can potentially pay off in either direction. The mistake would be allocating to these the way one would allocate to stocks or bonds. Their volatility is too high for taking large portfolio positions, ironically. 

Today’s stock market is full of surprises, alongside opportunities. And with at least these three different ways to use the VIX as the anchor of risk management strategies, it appears the demise of the 30-year-old market volatility indicator has been greatly exaggerated.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.