By Columbia Threadneedle Investment Team
The Chicago Board Options Exchange Volatility Index (VIX) is the market's most widely followed measure of fear and risk. But is this a good measure?
Global Chief Investment Officer Colin Moore recently highlighted the lack of volatility in the markets and asked our investment leaders to join the low volatility and valuation debate. But we also wanted to take a closer look at the way many investors measure volatility - by monitoring the VIX - and hear from two senior members of our global asset allocation team to get their interpretations. Is it flawed?
Josh Kutin, Senior Portfolio Manager, Global Asset Allocation team: It's not that the VIX is a bad indicator of fear and risk, it's just that there are forces that are dragging it down. There is a lot of trading activity that is keeping the VIX low - I am mainly referring to trades where market participants are betting on the direction of volatility and shorting the VIX. When the market inevitably goes into distress, we'll see the VIX go higher after the fact. The VIX may be the right indicator of current fear but it is not predictive of future fear levels.
Maya Bhandari, Senior Portfolio Manager, Global Asset Allocation team: A chief "flaw" of the VIX is that it captures implied volatility in U.S. equities only, which makes it tricky to interpret for global investors. I look at two deeper measures of risk aversion that include more asset classes - one for developed markets and the other for emerging markets. Both use equally weighted indices that reflect sovereign spreads, credit spreads, TED spreads and implied volatility in currencies, equities and swaps. I tend to pay more attention to these broader indicators and surveys that rate consumer and business confidence than I do to the VIX when gauging fear and risk.
The VIX may be a good indicator for some aspects of market volatility, but it's not future-proof, and it doesn't provide a reliable global interpretation. To get a more accurate understanding of fear and risk - especially in today's eerily quiet market environment - look to broader measures of volatility and investor sentiment.
Chicago Board Options Exchange Volatility Index (VIX) reflects a market estimate of future volatility, based on the weighted average of the implied volatilities of S&P 500 Index options.
TED spread is the difference between the three-month London Interbank Offered Rate or LIBOR (the interest rate on interbank loans) and the three-month U.S. Treasury bill.
© 2017 Columbia Management Investment Advisers, LLC. All rights reserved.
With respect to mutual funds and Tri-Continental Corporation, investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. To learn more about this and other important information about each fund, download a free prospectus. The prospectus should be read carefully before investing.
Investors should consider the investment objectives, risks, charges, and expenses of Columbia Seligman Premium Technology Growth Fund carefully before investing. To obtain the Fund's most recent periodic reports and other regulatory filings, contact your financial advisor or download reports here. These reports and other filings can also be found on the Securities and Exchange Commission's EDGAR Database. You should read these reports and other filings carefully before investing.
The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.
Columbia Funds and Columbia Acorn Funds are distributed by Columbia Management Investment Distributors, Inc., member FINRA. Columbia Funds are managed by Columbia Management Investment Advisers, LLC and Columbia Acorn Funds are managed by Columbia Wanger Asset Management, LLC, a subsidiary of Columbia Management Investment Advisers, LLC.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.
NOT FDIC INSURED · No Bank Guarantee · May Lose Value