The stockmarket fear index: All noise or a buying opportunity?

With plenty of catalysts driving volatility across financial markets, we discuss whether investors should take the ultimate fear index seriously. 

19 January will mark the 26th anniversary since the VIX index started publishing live prices. Launched by the Chicago Board of Exchange (CBOE), it is still considered to be the ultimate barometer of global equity market fear, and is designed to reflect investors' view of stockmarket volatility for 30 days ahead. 

Although the VIX measures expected price fluctuations in the S&P 500, where the US goes, the rest of the world typically follows, hence it is considered a measure of fear across global markets.

The current VIX level of around 18 suggests that the market is relatively untroubled – despite what is going on in the UK. interactive investor looks at whether the VIX index is noise or substance, and what level might be worthy of attention.

Rebecca O'Keeffe, Head of Investments, interactive investor says: "Volatility in the markets has become the hallmark of investor fear, with low levels of implied volatility a sign of calm and content, while heightened levels show investor stress. This was never more evident than when the VIX index pushed up above 80 in November 2008 at the height of the financial crisis. 

"More recently, Quantitative Easing has dampened implied volatility, but nonetheless, big moves in the VIX are clearly important and a major move up can be a clear signal that most investors are bearish – which may potentially provide a buying opportunity.

"The current VIX index is trading at around 18. This is average for current conditions, and down from 36 just three weeks ago. This suggests that the market is relatively untroubled – despite what is going on in the UK!"

How do interactive investor colleagues approach volatile markets?

Look to active managers?

Moira O'Neill, Head of Personal Finance, interactive investor says: "Whilst the VIX index is around its historical average, not all investors will be feeling quite as sanguine, with the market volatility we saw towards the end of last year and political uncertainty both sides of the Atlantic making them nervous.

"Those who have traditionally tended to use passive funds (and I'm one of these) to keep costs low might want to look to active funds, which actively seek to find the best opportunities, rather than following the market up our down. interactive investor's Super 60 select list of funds can help with your selection, as we include active funds and investment trusts alongside passive recommendations.

"My own pick is F&C Investment Trust, which has a good global and asset class diversification and a proud 150-year history."

Regular investing as soundproofing

Lee Wild, Head of Equity Strategy, says:

"Investors have their work cut out contemplating every twist and turn in markets, never mind the level of the VIX. Market timing is notoriously difficult, so one solution is to cut through all of that and start regular investing on a monthly basis. Known as pound cost averaging, it can help remove some of the risk of market timing and act as good sound proofing from all the market noise."

Using the VIX Level as an indicator

Rebecca O'Keeffe says: "My magic number is 28. Once the VIX reaches this level, I tend to look at the markets and see if there are buying opportunities. This is because the VIX is a fear index and markets tend to overshoot on the downside when investors are running scared. Not a strategy for the faint of heart, but typically the best time to buy is when the wider market is selling. 

"Like any trading strategy, it doesn't always work and it is nigh on impossible to buy at the bottom consistently. For example, buying in late-2015 or early-2016 wouldn't have been pretty in the short term but the market recovered strongly over the course of that year. Going further back, 1987 and 2008 were huge buying opportunities, but most markets struggled in 2018 alongside spikes in the VIX. 

"This is not to say that I don't appreciate the concept of buying and holding - but buying in at an attractive price and then (hopefully) reaping the rewards of a bounce is even better."

Moira O'Neill says:

"There are many different approaches to volatility, one of which is to simply ignore short-term moves in the market on the basis that they are likely to be minor blips in an overall upwards trend – but if you are a more adventurous investor, or keep a pot of money for trading, then paying attention to the stock market fear gauge may present some interesting opportunities."