Record 3-Week VIX Drop, and Diversification Ideas By Matt Moran

Saturday, Jan. 19, 2013 – Yesterday the CBOE Volatility Index® (VIX®) closed at 12.46, its first daily close below 13.00 since June 2007.  In addition, the S&P 500® Index reached a 5-year high yesterday.


Over the past three weeks (ending Jan. 18th) the VIX Index fell 45.2%, its biggest-ever 3-week fall in % terms. (The inception of the VIX price history is in Jan. 1990).

The CBOE S&P 100 Volatility Index (VXO) has data history back to 1986, and its largest 3-week fall in % terms was down 51.8% in the 3-week period ending  Nov 13, 1987.


With VIX at relatively low levels, some investors are asking about how to gain exposure to VIX.

Over the past decade many investors have noted with dismay that many assets have become more highly correlated (see, e.g. Chart 2 below).  Some investors have explored the possibility of using a small tactical allocation to products designed to track VIX-based indexes to help achieve their goals (see Chart 1 below).

Here are the returns for the 3rd quarter of 2011 (during which the U.S. debt received a downgraded rating) —

  • -13.9%                  S&P 500 (TR)
  • 157.3%                  S&P 500 VIX Short-term Futures Index TR
  • 45.4%                    S&P 500 VIX Mid-term Futures Index TR

Here are the returns for the 1st quarter of 2012

  • 12.6%                    S&P 500 (TR)
  • -53.3%                  S&P 500 VIX Short-term Futures Index TR
  • -24.5%                  S&P 500 VIX Mid-term Futures Index TR


If you do consider a longer-term allocation to the products on the VIX-based indexes, please research closely issues regarding roll costs, contango and backwardation. Past results are not a guarantee of future performance.


Indexes that have had higher correlations

The posts on this blog are opinions, not advice.
Please read our disclaimer for Indices.

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