With the so-called fear index trading near a 12-month low,
some contrarians think the market is extremely overbought and
ready for a fall. The VIX, short for the Chicago Board Options
Exchange Market Volatility index, has tumbled some 65 percent
in the past 5 months, as stock prices have rallied.
The VIX is now trading at a level which has triggered
many sell-offs in the stock market over the years as investors
become more and more comfortable and greedy with rising stock
prices, financial blogger Michael Michaud wrote recently
on Seeking Alpha.
But other observers say that makes this a good time to buy
exchange-traded funds that track the VIX as a form of portfolio
Risk-taking has started to replace fear, Daniel
Sckolnik, a senior analyst for research firm Sabrient Systems,
wrote in a recent edition of its newsletter, ETF
Periscope. And Sckolnik says, Thats an
opportunity to catch up on some portfolio insurance via the VIX
at what is a relatively low price.
He notes that the explosive nature of the VIX, which can
shoot up 20 percent or more within a few days if the market
starts to tank, makes it a valuable tool for protecting
yourself against sharp, downside moves.
Since you cant trade the VIX directly, Sckolnik
recommends one of the various ETFs that track the index. He
likes the VXX (iPath S&P 500 VIX Short-Term Futures ETN),
which tracks the near-term futures, in particular because it is
one of the most liquid of the VIX-based ETFs.
Sckolnik also likes the VXZ (iPath S&P 500 VIX Mid-Term
Futures ETN), which he says can be used to similar effect,
though he notes that it has a slightly less explosive
nature than the VXX, as it tracks the VIX midterm
"With the VIX trading at levels not touched on since 2007,"
he told Institutional Investor in an
email on Wednesday, "it remains a great opportunity to
acquire relatively 'cheap' insurance against sharp drops in the
market that may occur due to an Israeli strike against Iran, a
disorderly Greek default or a less obvious 'Black Swan'
There are other ETFs available to hedge against a market
correction, as Stoyan Bojinov pointed out on Wednesday on
ETFdb, an ETF online database.
Bojinov identifies the following three: the U.S. Market
Neutral Anti-Beta Fund (BTAL), which holds long positions in
the lowest beta stocks and short positions in the highest beta
stocks; the U.S. Market Neutral Quality Fund (QLT), which buys
stocks that have a combination of high return on equity and low
debt-to-equity, while at the same time shorting securities with
low or negative return on equity and high debt-to-equity
ratios; and the U.S. Market Neutral Anti-Momentum Fund (NOMO),
which holds long positions in stocks that are deemed to exhibit
low-momentum characteristics, while simultaneously shorting