What is a VIX when trading ETFs in Singapore?

What is a VIX?

A VIX is an index developed by the Chicago Board Options Exchange (CBOE) in 1993, which measures the volatility of the S&P 500 Index. Volatility generally refers to how much prices change around their average or mean; therefore, when there are significant fluctuations in the market, indices like VIX go up.

 

What are uncorrelated ETFs?

Uncorrelated ETFs are passive funds that track various equity indices without significant deviation due to individual stock selection or market timing/sector allocation decisions specific to managers of active funds. 

 

Because they are not actively managed, un-correlated ETFs tend to be more stable than correlated ETFs and can be used as a hedge against downside risk. Of course, if you look at these two parts individually (i.e. you don’t understand the correlation between them), then they are both bogus/wrong statements.

 

What are EFTs?

ETFs (exchange-traded funds) are managed funds listed on the Singapore Stock Exchange (SGX). They are designed to track either an index or a basket of assets, including commodities, bonds and even other ETFs, to provide diversification benefits over investing in single securities.

 

There can be many reasons for investors to trade volatility, including hedging risks, speculation, etc. We will look at how traders use VIX indices to speculate on market volatility without resorting to derivative instruments or futures contracts.

 

Correlation

In terms of correlation, it is essential to note that there can be a negative or positive correlation between two assets – this means that they both have a direct impact on each other. If you own shares in Apple and IBM, and IBM’s share price goes down, it hurts your investment because its value will reduce as well. 

 

Therefore these two securities are negatively correlated towards one another. However, if you owned both IBM stock and Apple stock and noticed that their prices were going up at the same rate, they would positively correlate to one another.

 

ETFs are managed funds.

In Singapore, ETFs are managed funds that track local stocks or foreign ones based on a specific policy. They can be passively managed, which means that the managers of these funds will not actively buy and sell stocks to track their index precisely – instead, they will stick to their investment policy and track the market as closely as possible. 

 

Because authorised participants manage these ETFs, there is strict regulation on how much capital is required when creating/redeeming shares in this fund, ensuring market liquidity. If there were no regulations or restrictions, investors would not receive what they ordered when redeeming their investments, thus causing them financial harm (a lack of liquidity in markets can also cause prices to become volatile).

 

Uncorrelated ETFs

Uncorrelated ETFs in Singapore track indices in local stocks, so they tend not to relate to one another unless it is part of a broader asset allocation strategy. When investors compare VIX indices to the price movements of ETFs, they are looking for correlations between the volatility in these assets and how they move relative to each other – this can offer insight into whether or not there are trading opportunities available.

 

VIX indices are fear gauges

As mentioned before, VIX indices are fear gauges because they measure volatility by using derivatives that have future expiry dates on them so that their prices fluctuate with investor sentiment. It’s done because there are no futures contracts available for individual stocks. These indices consist of two parts:

 

  • The first is known as the spot index, which tracks where current market prices are at – its value changes depending on what investors believe will happen next.
  • The second part is the VIX futures, designed to act like caps/floors on how high/low the spot index can move using derivatives.

 

Bottom line

Trading is all about profiting from volatility – however, investors need to ensure that they understand what they are getting themselves into before making any big moves, so research is vital here. Additionally, it allows individuals to understand better what opportunity costs are or if there are any risks involved in their trades.

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