What’s Up With The VIX?
Understanding The VIX And What It’s Trying To Tell Us
The past few days (writing this as of 8/31/20) have seen a strange phenomenon occur. The VIX (as proxied by VIXY, a long VIX ETF — fully explained later) has returned almost 10% at the same time that the S&P 500 increased by approximately 2%.
It’s weird that they’re moving in the same direction. VIXY and the S&P 500 are highly negatively correlated — meaning that when one goes up, the other usually goes down. The correlation between the two funds’ daily returns since 2011 is -0.81. That’s why funds like VIXY are widely used as portfolio hedges. For comparison, the most popular portfolio hedge out there, long duration U.S. Treasury bonds (TLT), has a -0.48 correlation to the S&P 500 — significantly less than VIXY’s.
In fact, since the March 2020 stock market crash, the VIX has remained stubbornly elevated. Usually, when the market is repeatedly registering new all-time-highs, the VIX hovers in the 10–15 range. In 2013, when the S&P 500 finally made a new high following the 2008 Great Financial Crisis, the VIX was at 13.62 — a level it remained close to for most of the next 7 years (besides the occasional bout of market volatility, one of which I covered in depth in this post).
