Exchange traded funds that track CBOE Volatility Index futures have rallied this week on renewed fears of a disorderly Greek default.
The VIX shot higher by 16% on Tuesday as markets were surprised by Greece’s leader calling for a referendum on the latest bailout. The move raises uncertainty over whether the financially troubled country will remain in the European Union.
Wall Street’s “fear index” has spiked after falling below 25, “generally considered the dividing line between a worried market and a not-so-worried market,” reports WSJ.com’s MarketBeat.
The iPath S&P 500 VIX Short-Term (VXX) and VelocityShares Daily 2x VIX Short Term ETN (TVIX) are among the most actively traded volatility-linked products. The exchange traded notes rose 14.5% and 26% on Tuesday, respectively. They track VIX futures contracts, rather than the spot price. They traded lower in Wednesday’s premarket as stock futures pointed to a green open. Markets will get the Federal Reserve announcement later Wednesday, followed by a press conference with Chairman Ben Bernanke.
The week’s 45% VIX gain still does not match August 8th’s 50% single-session rise after the S&P downgraded the U.S. credit rating, reports Christopher Dieterich at Dow Jones Newswires.
The index is watched closely by investors to gauge market sentiment and was in a slump last week as European officials appeared to have hammered out a debt deal.
“The market doesn’t like unknowns, and the situation in Greece today was a definite unknown,” Stephen Solaka, co-founder of Belmont Capital Group in Los Angeles, said in a Bloomberg report. “Bad news is OK as long it’s known. Unknown news or surprises cause issues, cause sell-offs and fears to appear. Fear is back on the table.”
The Greek referendum is viewed by market watchers as an event that could stir more financial instability and dampen the outlook for the Eurozone.
iPath S&P 500 VIX Short-Term ETF
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Tisha Guerrero contributed to this article.