Tags: VIX | volatility | ETN | bear

Volatility Is Up, But VIX Is Still a Bad Investment

By    |   Wednesday, 05 Feb 2014 06:59 AM

With the Dow Jones Industrial Average down 5 percent in January, many investors are concerned about the effect another bear market would have on their wealth. Some are considering buying investments billed as insurance against a bear market. In reality, most of those investments enrich brokers, but fail to protect wealth.

The CBOE Volatility Index (VIX) is a popular tool for salesmen offering wealth protection. VIX is often called the "fear index" because it rises when the fear of a market decline grows. The tendency of VIX to "zig" when prices "zag" can be packaged in an attractive way and gives investors a false sense of confidence.

There are a number of exchange-traded notes (ETNs) that track VIX. An ETN is similar to an exchange-traded fund (ETF), but an ETN holds derivatives rather than stocks in its portfolio like an ETF does.

One volatility product, iPath S&P 500 VIX ST Futures ETN (VXX), has lost 92 percent of its value in the past two years. However, VIX has only declined by 24 percent over that time.

This example demonstrates that in the long run, VIX ETNs lose money. They are not designed as long-term investments, yet some financial advisers sell them as crash insurance. This ignores the reality that fear and VIX spike rather than trend. There is no way for long-term investors to benefit from the short-term moves in VIX.

For long-term investors, the best way to avoid bear market losses is to decrease exposure to stocks. There is a risk of missing out on potential gains if the market moves up instead of down, but that risk is usually less than the loss investors would face in an ETN that tracks VIX.

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MichaelCarr
With the Dow Jones Industrial Average down 5 percent in January, many investors are concerned about the effect another bear market would have on their wealth.
VIX,volatility,ETN,bear
284
2014-59-05
Wednesday, 05 Feb 2014 06:59 AM
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