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VIX forecast: Is VIX a good investment?

16:47, 17 June 2022

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VIX forecast: Is VIX a Good Investment? Price change on trading VIX (Volatility Index) futures on blue and green finance background from graphs, charts, columns, candles, bars. Trend Up and Down, Flat. 3D illustration
VIX forecast: Is VIX a Good Investment? Photo: zah108 / Shutterstock.com

The Chicago Board Options Exchange’s (CBOE) Volatility Index (VIX), a key measure for gauging market volatility, has surged year-to-date (YTD), as of the time of writing (17 June). The index’s day range of 30.35 to 34.82 (16 June) indicated abnormally high volatility, while the year range was 14.10 to 38.94, as of 17 June.

A volatility index level of 20 and above is usually considered to be abnormally high, while a level of 12 or below is indicative of the market exhibiting low volatility.

The VIX was 31.23 at the time of writing (17 June), marking a rise of 93.4% YTD and 80.9% over a year. 

Read on to gain a better understanding of what the VIX is, its purpose and effect on investor sentiment, and what factors are expected to drive volatility higher.

An introduction to the VIX

The VIX is a real-time measure of market volatility. The index measures the stock market’s expectation of volatility based on the mid-quote prices of S&P 500 (US500) Index call and put options. It presents a 30-day forecast of volatility in the market. 

Volatility can be used to understand market sentiment and the appetite for risk. This is why the CBOE Volatility Index is also known as the ‘fear gauge’ or ‘fear index’. 

The index was incorporated by CBOE Global Markets in 1993 to measure the market’s expectation of 30-day volatility implied by at-the-money S&P 100 Index option prices. In 2003, CBOE, along with Goldman Sachs, updated the VIX to reflect a new way to measure expected volatility that took into account S&P 500 index options.

Investors can use the VIX as a tradable asset through exchange traded funds (ETFs) and exchange-traded notes (ETNs). 

Some examples of these are the Path Series B S&P 500 VIX Short-Term Futures ETN (VXX), the iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ), the ProShares VIX Mid-Term Futures ETF (VIXM), and the ProShares Short VIX Short-Term Futures ETF (SVXY).

Factors expected to affect volatility in the near-term

In order to understand if the VIX will move higher or lower, the following factors should be taken into account:

The Russia-Ukraine war

Russia’s invasion of Ukraine on 24 February sent stock and commodity markets into turmoil. 

The closure of the Russian equity market for nearly a month after the war began, the decline in the value of the Russian rouble (RUB) and sanctions imposed on Russia by several countries, including the US, UK, Canada, Switzerland, Japan and Australia, affected global trade. 

This created higher prices across many industries, leading to rising inflation across major economies and increased volatility in global markets.

Record-high inflation, lower retail sales

Inflation in the US rose to a new 40-year high in May – 8.6% higher than a year earlier. This was due to higher prices for petrol, food and other necessities, data from the US Department of Labor said last week. The consumer price index (CPI) increase in May was the largest rise since 1981.

Consumer prices in May increased faster than April’s year-over-year (YoY) jump of 8.3%. On an on-month basis, prices increased 1%, marking a steep rise from the 0.3% increase from March to April.

Higher price pressure made consumers change their spending habits. Retail sales in the US fell at a seasonally adjusted rate of 0.3% month-on-month.

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Consumers were worried about the impact of high inflation on living standards. The US Federal Reserve (Fed) could move to further tighten monetary policy in an effort to control inflation.

The Fed’s tighter monetary policy

Taking high inflation into account, the US central bank’s rate-setting Federal Open Market Committee (FOMC) raised its benchmark interest rate by 0.75% to the 1.5%-1.75% range on 15 June.

US Federal Reserve Chairman Jerome Powell said he expects to see a rise of 50 or 75 basis points to the benchmark rate at the FOMC’s July meeting. In its report released on 15 June, the US central bank said that it was “committed to returning inflation to its 2% objective”.

Along with rate hikes, the Committee will “continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May,” the FOMC report said.

China’s pandemic-related restrictions 

China’s reinestation of Covid-19 restrictions just a few weeks after they eased across its major cities could add volatility to equity markets. The restrictions were reimposed after Beijing reported 45 new local cases of Covid-19 on 13 June, having reported single-digit cases on most days in the week ended 11 June.

VIX forecast: Analyst sentiment

According to a Markets Insider news report published on 16 June, Fairlead Strategies' Katie Stockton told clients in a note on the same day that if the VIX crossed the 38 level, stock markets could face another round of fear-led sell-offs.

“The ~38 level is significant for the VIX, in that if it is broken, it would increase the risk of a capitulatory spike. The VIX exhibits positive short-term momentum and has room to resistance [~38], which increases risk for the inversely correlated SPX in the near term,” Stockton said.

This deduction is based on the VIX and the S&P 500 index being inversely correlated, as noted in the report.

The VIX forecast 2022, VIX forecast 2025 and VIX forecast 2030 were not available.

 It is important to note that using volatility as a tradeable asset can be risky. You must carry out due diligence before proceeding with any investment tied to the CBOE volatility index. And never invest money that you cannot afford to lose.

FAQs

Is VIX a good investment?

The index’s abnormally high value due to a number of factors creating volatility in global markets means that it’s uncertain whether the VIX is a good investment. 

Whether VIX is a good investment for you or not will depend on your portfolio composition, investment goals and risk profile, among other factors. Different trading strategies will suit different investment goals with short or long-term focus. You should do your own research. And never invest money you cannot afford to lose.

Make sure you do your own research. And never invest money that you can’t afford to lose.

Will the VIX move higher?

No-one can say for certain. The possibility of increased volatility in global markets is high, considering the factors at play.

Should I invest in VIX?

Whether VIX is a good investment for you or not will depend on your portfolio composition, investment goals and risk profile, among other factors. Different trading strategies will suit different investment goals with short or long-term focus. You should do your own research. And never invest money you cannot afford to lose.

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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