Market Volatility Ahead? What to Know About the Cboe VIX
Is VIX a leading or lagging indicator?
The VIX is a forward-looking index. It is a leading indicator of the potential risk inherent in the S&P 500, and by proxy in the stock market. It is also a leading indicator of the level of fear that investors and traders have toward the market in the near term.
How much weight should the VIX have on investment decisions?
For advisors and investors whose time horizon is long term, the VIX probably shouldn’t carry too much weight in your investment decisions. For a client whose main goal is retirement in 20 years, where the VIX stands today or even next year seems pretty irrelevant.
For investors looking to make portfolio adjustments in the near term, looking at volatility expectations might play a role in the timing of some of their moves. It’s important to realize that the VIX is just an indicator. Things can and do change quickly in markets, so relying on any one piece of data or indicator can be dangerous for investors.
How have VIX ETPs done?
There are a number of exchange-traded products that look to track the VIX but actually invest in VIX futures contracts. This exposes investors not only to the movements of the index, but also to any factors affecting the futures contracts.
In a recent ThinkAdvisor article, Morningstar’s Ben Johnson said: “VIX-linked ETPs have effectively destroyed $12.4 billion in capital during nearly 12 years since they debuted. Investors should steer clear.”
If we look at the training returns of four popular ETPs, we see a lot of variations in returns:
YTD
1 year
3 years
5 years
ProShares VIX Short-Term Futures ETF (VIXY)
15.23%
-74.74%
-46.88%
-41.67%
iPath B S&P 500 VIX Short-Term Futures ETN (VXX)
15.54%
-74.61%
-46.74%
N/A
ProShares VIX Mid-Term Futures ETF (VIXM)
-0.13%
-28.25%
9.16%
-3.80%
iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ)
-0.35%
-23.18%
9.42%
N/A
S&P 500 Index
-5.17%
23.29%
20.71%
16.78%
Data via Morningstar as of Jan. 31, 2022
Looking at this another way, according to a chart on the ProShares website, $10,000 invested in VIXY and VIXM on Jan. 3, 2011, in each case would now be worth the following as of the close on Feb. 1, 2022:
VIXY $5.06.
VIXM $925.49.
Looking at some other VIX-related ETPs also shows volatility over time. These products seem best suited to short-term trading rather than long-term investing. As an advisor, it is up to you to determine if these products have a place in your client’s investment strategy.
The VIX is an interesting indicator to watch. For most advisors and clients who invest on a longer-term basis, it might not be the most relevant market benchmark on which to base future investment decisions, at least not by itself.
Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.
