Why VIX ETFs Are Spiking With Stocks At Record Highs
The VIX topped 21 on Monday.
The SPDR S&P 500 ETF Trust (SPY) is less than 1% from its all-time highs, yet the Cboe Volatility Index (VIX) rose above 21 on Monday—a reflection of the mixed emotions that investors are feeling.
Encouraged by the stronger-than-expected economic data released over the past month, as well as the Fed’s recent 50 basis rate cut, investors pushed the S&P 500 to a new record closing high on September 30.
But even though the index remains near those lofty levels, the VIX has risen from around 15 to more than 21.
VIX: The 'Fear gauge'
Widely considered to be Wall Street’s “fear gauge,” higher levels for the VIX tend to coincide with market drawdowns.
The VIX doesn't measure actual, realized volatility. It measures what is known as implied volatility, which is calculated based on the price of near-term S&P 500 Index options, or those with 23 to 37 days until expiration.
When stocks gyrate wildly, options contracts—which allow investors to buy or sell at predetermined prices—tend to cost more.
Typically, implied volatility rises as the market falls (and vice versa), which makes the recent increase in the VIX with the market near all-time highs interesting.
High on Stocks but Wary of Risks
One interpretation of the dichotomy could be that investors are bullish on stocks, but nervous about the many risks that are lurking: the U.S. election, conflicts in the Middle East, and a labor market in flux.
The third quarter corporate earnings season also kicks off this month, adding another factor for investors to consider.
That said, hedging these risks with options or investments in VIX-related products come with a cost. Put options, which protect against downside, can be expensive, while VIX exchange-traded funds tend to decay over time.
The Barclays iPath Series B S P 500 VIX Short Term Futures ETN Series B (VXX) is up 16% over the past two weeks, but it’s down 12% since the start of the year.
A better hedge could be gold, which is cheap to hold. But with the price of the metal already up 28% this year, investors will have to pay up for exposure to the metal.