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Correlation Study – Investing in Fear

Investing in fearWe had a great tech support call come in today. A long time FastTracker has been “tracking the VIX” and looking to get direct exposure to the index. He asked, “what’s the ticker to buy the VIX?”

Well, the answer is simple, but first let’s go through some background. The VIX is an index, more specifically its the CBOE Volatility Index (FastTrack ticker VIX-X). The vix usually referred to as the “fear index” and typically tracks opposite to the overall market. An investor would look for exposure to the VIX to capitalize on market downtrends.

That being said, the VIX is still an index. So… you cannot buy it directly. You must buy an ETF or mutual fund that tracks the VIX index. So, how do you use FT Cloud or FT4web to find these ETFs? Its simple, we’ll do a correlation analysis with the spreadsheet. We’re going to look for all and any fund in the FastTrack database that is highly correlated to the CBOE VIX index.

Note: We could search ticker names, google search, or something similar. But if you’ve used FastTrack techniques and products, you’re well aware that names are some of the least informative aspects of a security. Just because you call yourself a “VIX ETF,” doesn’t mean you are a VIX ETF. The score board (past performance) says it all. 

Here’s a step by step to find the ETF that track the VIX.

  1. First we’re going to load all the ETFs in the FastTrack database. Log in to FT Cloud, click on the FT Cloud spreadsheet tab, in the upper right corner, click the “load family” button. Investing in the VIX
  2. Next, navigate to the All ETF family. Its located under the Funds > Companies > ETFs > All ETFs. Double click the family, then click load in the lower right of the load window.Investing in the VIX
  3. Now, to run our correlation study, we’re going to find all the ETFs that have a high correlation to the CBOE VIX Index. In FastTrack the CBOE VIX index uses the ticker VIX-X (We used the ticker search feature to find the index). The correlation column on the spreadsheet correlates to the “benchmark” field. So, we’re going to type VIX-X into the benchmark field and change our dates to a one year time period (this example uses a one year correlation study… but you can alter the date ranges for different studies)Investing in the VIX
  4. After we press the “Compute” button in the upper left corner, the spreadsheet will fill with the calculations we need for the study. Next, we are going to click the “Corr” header to sort the spread sheet from highest correlation to lowest correlation. (Click the Correlation check box in the “stats” list on the right hand side to show the correlation column on the spreadsheet.)Investing in the VIX
  5. There we have it. While there’s no perfect 100% correlation, we get pretty close with 91%-88% range over one year.

So, to summarize, to find an ETF, or in this case ETFs and ETNs, that track the CBOE VIX index, we do a simple correlation study. This study shows us that we don’t have an instrument that tracks the CBOE VIX index exactly, but we’ve got a handful of ETFs and ETNs that get pretty darn close.

Results: The we derived the following one year correlations to FT ticker VIX-X

  • VIXY – ProShares VIX Short-Term Futures- 91%
  • VIIX- VelocityShares VIX ST ETN – 90.89%
  • UVXY – ProShares Ultra VIX Short-Term Futures – 90.59%
  • TVIX – VelocityShares Daily 2x VIX ST ETN – 89.53%
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