The fear index is on the move

With both the market and VIX up recently, it may be time to play the VIX.

By Stock Traders Daily Jun 18, 2013 10:19AM

Stock market report (© ULTRA.F/Digital Vision/Getty Images)Anyone who has been following the Market Volatility Index ($VIX) and VIX-related ETFs over the past year knows that these instruments have been decimated. Usually, investors who buy VIX or its related instruments do so as a hedge against risk, and they normally use only a small part of their portfolio to do so. But a decline like the one we have seen over the past year can make an investor who has only a small amount allocated to this hedge raise his eyebrows.


In every respect, this is understandable. The moves are aggressive, and some of the instruments related to VIX are leveraged two and three times as well. That multiplies the risk, of course, but it also multiplies the risk control if the market begins to experience problems.


Ultimately, that is exactly why investors are attracted to VIX in the first place. They want to protect their portfolios, but until recently no one has had any reason to worry. In fact, even now some investors are still as sanguine as ever. This complacency has manifested as summer comes, but something equally as interesting has also begun to happen.


The market is still significantly outperforming VIX and VIX-related ETFs over one-year durations, but over the past month VIX-related ETFs have begun to significantly outperform the market.


VelocityShares Daily 2x VIX Short Term ETN (TVIX) is the biggest winner, with about a 27% increase over the past 30 days. iPath S&P 500 VIX Short Term Futures ETN (VXX) is up about 15%, and iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) is up about 10%. At the same time, the SPDR S&P 500 ETF Trust (SPY) is down by about 2%. The outperformance during this down period in the Market has been significant, but something else also is very interesting.


Over the past five days ending Monday the Market is actually up slightly, but VIX and VIX-related ETFs are up even more. The market has increased, and VIX has increased -- and that is unusual. The fear gauge has actually increased even though the market has increased too, and that is a telling sign. It suggests investors are more concerned than they were, and it tells us risks may actually begin to surface again. If nothing more, we know that sentiment is no longer what it was a few months ago.


This shift is important. Investors absolutely should be protecting their assets, and VIX and VIX-related ETFs are a good way to do that. But the ETFs that are available that follow the VIX are not all the same, and investors who are considering them should look closely at what they are buying before they make a decision to integrate a VIX-hedge. For example, the best performing VIX-ETF over the past month, TVIX, is by far the worst performing over longer term durations, so make sure you know what you are buying before you buy it. Stock Traders Daily has already suggested VIX related ETF positions to its clients.

6Comments
Jun 18, 2013 11:30AM
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Unles you`re a pro, stay away from things like this.The pros love to get new guys who

think they can outsmart the market.

Jun 18, 2013 11:32AM
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Aaahhh, sitting back reclining in my smug Trump chair...I already won this monopoly game....the FED and its wonderful QE stimulus program, the unemployment facts and figures, housing construction boom...why there's green shots all over the place. Not everyone can be rich....we need the masses happy and content. We just tell them everything's fine, shoot them a little government bonus check in the mail from time to time. It's wonderfully easy. I'm so thankful for the wonderful American education system and the mercury doping program keeping everyone in-line with head to grind-stone. It's been delightful ..wealth is mine. Everyone's a mindless robot around me...working for me. I even have these wonderful people selling me their physical gold and silver for today's spot paper price taking paper debt for it....it can't get any better than this. Thank you...thank you all, GoldFinger
Jun 18, 2013 11:19AM
Jun 18, 2013 7:34PM
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Sounds like another guy trying to talk down the market.  Eventually it will work, but keep an eye on what Buffett does.
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