Tariff Fears Send Key Volatility ETF Soaring
The VIX, also known as "the fear index," and the VIXY volatility ETF surged to 2025 highs on fears of an escalating and prolonged trade war.
Investors are growing increasingly fearful of a prolonged trade war as key trading partners Canada, Mexico and China respond to U.S. tariffs with retaliatory levies on U.S. goods.
These worries translated into rising volatility in financial markets, as measured by the CBOE Volatility Index (VIX) and the ProShares VIX Short-Term Futures ETF (VIXY). Both have surged in recent sessions as investors brace for potential economic disruptions tied to trade policy uncertainty.
After a 30-day delay, President Trump implemented 25% tariffs on imports from Canada and Mexico on Tuesday. Additionally, he introduced a second round of 10% tariffs on Chinese goods, raising overall tariffs on China to 20%.
In response, Canada swiftly retaliated with a broad set of counter-tariffs on U.S. products, some taking effect immediately. Meanwhile, China imposed duties of up to 15% on U.S. agricultural exports and introduced trade restrictions.
The VIXY exchange-traded fund, which holds futures contracts to track the S&P 500 VIX Short-Term Futures Index, spiked to its highest level in 2025, as fears of a prolonged trade war have sparked concerns about declining consumer sentiment, slowing economic growth, increased inflation and corporate profit declines.
Understanding the VIX Index and VIXY ETF
The VIX index, commonly referred to as the market’s "fear gauge," measures expected volatility in the S&P 500 over the next 30 days. It rises when investors anticipate greater market turbulence, typically due to geopolitical risks, economic uncertainty or financial instability.
The VIXY ETF provides exposure to VIX futures, allowing investors to hedge against market volatility or speculate on rising fear levels. Unlike the VIX index, which is not directly investable, VIXY tracks short-term VIX futures contracts, making it a popular vehicle for traders looking to profit from market uncertainty.
Tip: For further research and analysis, see etf.com's list of volatility ETFs.
Why the VIX and VIXY Are Spiking
The recent jump in the VIX index and VIXY ETF can be attributed to several key factors:
- Tariff Uncertainty and Trade War Fears: Investors fear higher tariffs on Canada, Mexico and China could lead to retaliatory measures, disrupting supply chains and hurting corporate earnings. Rising import costs could fuel inflation, complicating the Federal Reserve’s policy decisions.
- Market Volatility and Investor Sentiment: The S&P 500 and other major indices have experienced sharp swings, with investors rotating into defensive assets such as gold and Treasury bonds. Earnings uncertainty among multinational corporations has contributed to increased market jitters.
- Federal Reserve and Interest Rate Expectations: If tariffs drive inflation higher, the Fed may delay expected rate cuts or even signal a more hawkish stance, unsettling investors. Higher rates tend to weigh on stocks, exacerbating market volatility and boosting the VIX.
What’s Next for Volatility?
Market watchers are closely monitoring developments in U.S. trade policy, with many fearing tariffs could escalate into a prolonged economic conflict. If trade tensions continue to rise, the VIX index and VIXY ETF could remain elevated as investors seek protection against downside risks.
Conversely, if policymakers reach diplomatic solutions or ease trade restrictions, market confidence could improve, bringing volatility back down. However, with global growth already slowing and inflationary pressures lingering, volatility may persist in the near term.
Investors should stay informed and consider risk management strategies to navigate these turbulent times. Volatility ETFs like VIXY tend to be volatile themselves, as they can spike in any direction, and they are not intended for long-term holding.
