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- ETNs in particular can be less liquid and more difficult to trade as well as may carry higher fees.
- Downside risk can be adequately hedged by buying put options, the price of which depends on market volatility.
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- Though it can’t be invested in directly, you can purchase ETFs that track the VIX.
CBOE Volatility Index (^VIX)
Certain VIX-based ETNs Find undervalued stocks and ETFs have less liquidity than you’d expect from more familiar exchange traded securities. ETNs in particular can be less liquid and more difficult to trade as well as may carry higher fees. For instance, a stock having a beta of +1.5 indicates that it is theoretically 50% more volatile than the market.
The VIX, formally known as the Chicago Board Options Exchange (CBOE) Volatility Index, measures how much volatility professional investors think the S&P 500 index will experience over the next 30 days. Market professionals refer to this as “implied volatility”—implied because the VIX tracks the options market, where traders make bets about the future performance of different securities and market indices, such as the S&P 500. The Chicago Board Options Exchange Volatility Index, or VIX, is an index that gauges the volatility investors expect in the U.S. stock market. Rather, it’s alpari forex broker review a leading indicator that measures the level of stock market volatility expected by investors.
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However, it’s impossible to purchase a basket of securities that track the VIX. It’s possible to buy futures contracts or exchange-traded funds (ETFs) and exchange-traded notes that own review superforecasting: the art and science of prediction these futures contracts in an effort to mirror the index. Because the volatility index tends to rise when the S&P 500 falls, investors might do so if they’re bearish on the stock market.
Examples of how investors use the volatility index
As exchange-traded products, you can buy and sell these securities like stocks, greatly simplifying your VIX investing strategy. There are a range of different securities based on the CBOE Volatility Index that provide investors with exposure to the VIX. For people watching the VIX index, it’s understood that the S&P 500 stands in for “the stock market” or “the market” as a whole. When the VIX index moves higher, this reflects the fact that professional investors are responding to more price volatility in the S&P 500 in particular and markets more generally. When the VIX declines, investors are betting there will be smaller price moves up or down in the S&P 500, which implies calmer markets and less uncertainty.
About Volatility S&P 500 Index
After accusing Giuliani of destroying their reputations by lying that they tried to help steal the 2020 U.S. presidential election from Trump. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors. Experts understand what the VIX is telling them through the lens of mean reversion.
The VIX can help investors predict short-term performance, but the fluctuations shouldn’t concern long-term investors. It’s important to note here that while volatility can have negative connotations, like greater risk, more stress, deeper uncertainty or bigger market declines, volatility itself is a neutral term. It’s simply a statistical measure of price changes for a security or an index. Greater volatility means that an index or security is seeing bigger price changes—higher or lower—over shorter periods of time.
The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, personal finance education, top-rated podcasts, and non-profit The Motley Fool Foundation. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. However, the VIX can be traded through futures contracts, exchange-traded funds (ETFs), and exchange-traded notes (ETNs) that own these futures contracts. The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty.
Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange-traded products (ETPs). For example, the ProShares VIX Short-Term Futures ETF (VIXY) and the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) are two such offerings that track a certain VIX-variant index and take positions in linked futures contracts. One of the most popular and accessible of these is the ProShares VIX Short-Term Futures ETF (VIXY), which is based on VIX futures contracts with a 30-day maturity.
Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. Volatility values, investors’ fears, and VIX values all move up when the market is falling. The reverse is true when the market advances—the index values, fear, and volatility decline. The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility).