How do I invest in VIX

Volatility as a separate asset class: diversification through volatile ETFs

When stock markets fall, diversification is desperately sought after.

Unfortunately, it is not always possible to predict which asset class offers the best protection against stock crashes.

The best example was historic October 2008. In the wake of the Lehman bankruptcy, stocks plummeted.

Many investors with mixed - and supposedly well diversified - portfolios have relied on diversification through bonds or gold - and have been disappointed.

Gold, which often has a noticeable diversification benefit in equity crashes, was sold off with the stocks in the wake of the liquidity bottleneck of many hedge funds.

Bonds, too, could not deliver much in October, so that they could not noticeably offset the losses from equities.

The volatility skyrocketed back then. Since volatility is now "tradable" - also in the form of ETFs - it makes sense to think about investing in volatility.

An investment in volatility - what's behind it?

When markets are falling and investors are nervous, the average volatility in the markets increases rapidly. The measure for this is volatility.

In addition to the “historical” volatility, which is calculated from past share prices, the so-called “implied” volatility is also relevant.

It is calculated from the prices of the traded options and reflects the future volatility expected by market participants.

If the markets fall, then the implied volatility rises by leaps and bounds - and this often disproportionately to the falling stock markets. If the markets calm down again, it will slowly but steadily decline.

In the long term, the implied volatility tends to return to its mean value. So it fluctuates within certain limits.

Outliers - as in the autumn of 2008 - exist more upwards than downwards, which is a desirable property, since one benefits from a "price increase" in volatility when making an investment.

Investing in the VIX - best optimized

You can invest in volatility through products on volatility indices. Well known in Germany is the VDAX - the vola index on the DAX.

In the USA the corresponding counterpart is called VIX. This is where the vola index on the S&P 500 is hidden.

At first, volatility was tradable through futures on the VIX. With a long future position one can speculate on an increase in implied volatility, with a short position accordingly on a decrease in volatility.

The S&P 500 VIX Futures Enhanced Roll Index is based on these futures. In quieter market phases, the index invests in longer-term futures.

This has the advantage that the vola falls more slowly here than with short-term vola futures.

If the volatility picks up again, the index switches to short-term vola futures. These react more sensitively to changes in the market environment - which is desirable from the point of view of diversification into stocks.

The provider Lyxor now offers an ETF on the S&P 500 VIX Futures Enhanced Roll Index.

The volatility asset class is interesting as an investment - especially to protect yourself from a market environment where you don't know for sure whether you can rely 100% on bonds and gold as diversification.

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