How to invest in the CBOE Volatitlity Index
Investing in the CBOE Volatility Index could be the right option for you if you think markets are going to fluctuate considerably in the near future. There are numerous ways to invest in the performance of the CBOE Volatility Index, so we’re here to guide the entire investment process and ensure you’re fully equipped to dive in.
What is the CBOE Volatility Index?
The CBOE Volatility Index is a measure of the expectation of stock market volatility, pegged to S&P 500 index options. Commonly known as the VIX, the index tends to spike when the stock market becomes volatile and starts moving quickly up or down in a short amount of time. Unlike with most indices, the CBOE’s value is tied simply to how volatile the market is, not just whether stock prices are rising.
Is it a good investment?
That largely depends on your specific investment goals. When investing in the VIX, you’re betting on how sunstable you think the stock market is likely to be, which is a more complex idea than simply betting on whether stocks will rise or fall in value. As a result, this tends to be an investment strategy better suited for more experienced investors.
If you are going to invest in the VIX and are a new investor, consider putting down a smaller amount of money than you would if you were investing in a more conventional stock index, at least to start. This will help you learn the ropes and get to grips with how the index operates.
How do I invest in the CBOE Volatility Index?
While you can’t ‘buy’ a piece of an index, you can invest in its performance in a variety of ways. Here are three key steps to consider before investing in the CBOE Volatility Index:
- Choose an investment type
- Choose a platform
- Use our top tips to succeed
1. Choose investment type
There are many different methods you can use to invest in the CBOE Volatility Index’s performance. You’ll want to consider an array of different factors when deciding which route to choose, from the size of transaction fees to how easy each method is to use. Here’s a quick summary of the most popular options:
An ETF (exchange-traded fund) is an investment fund traded on a stock exchange. An ETF behaves like a stock, trading during regular stock market hours with a bid and ask price, and with near-instant order execution. ETFs can hold different assets, such as individual stocks, bonds, or commodities, or in this case serving as a proxy for the CBOE Volatility Index. A CBOE Volatility Index ETF can thus be an effective, low-fee way to invest in the VIX.
This method of investing is a good idea if you’re seeking low fees and a simple way to invest in the VIX.
A mutual fund is a professionally-managed investment fund that pools money from many different investors to invest in different assets, such as the CBOE Volatility Index. Mutual funds and ETFs both enable you to invest in an index’s overall performance, but – unlike ETFs – mutual funds must be bought through a broker or directly from the company that administers the fund. Also, mutual funds charge higher fees than ETFs do. Finally, mutual funds can only be traded after market close, whereas ETFs can be traded any time during regular market trading hours. A mutual fund that invests in an index is also called an index fund.
A CBOE Volatility Index mutual fund thus makes sense for investors who want to buy and hold for a longer period of time, since it’s more expensive to trade than an ETF.
2. Choose where to invest in the CBOE Volatility Index
Once you have decided which type of investment you want to use to invest in the CBOE Volatility Index, you’ll need to choose the service you want to use to execute your trade. Here are some of the most popular options:
- Brokers & trading platforms. Brokers and other online trading platforms offer inexpensive, easy-to-use tools that allow you to invest in the CBOE Volatility Index. The low transaction fees offered by online brokers make them attractive for all investors, especially higher-frequency traders. On the downside, online brokers don’t offer much investment advice, so if you’re looking for a more hands-on approach it is likely you’ll prefer other investing options.
- Robo advisors. Robo advisors rely on algorithms to execute trades, and also typically come with affordable transaction fees. Many robo advisors will also allow you to discuss your investment strategy with an advisor to help you make the right decisions. This makes a robo advisor an effective hybrid approach, but still one that’s more hands-off than investing with a licensed financial advisor.
- Financial advisors. Investing with a financial advisor is the most interactive way to buy into the CBOE Volatility Index. Financial advisors will thoroughly go over the pros and cons of any investment, which less experienced investors might appreciate – especially with a more complex investment such as the CBOE Volatility Index. Investing in the VIX is a more nuanced approach than investing in a typical stock index such as the S&P 500, so an advisor could make sense in this instance, but be aware that they come at a premium price.
- Banks. You can invest in an index such as the VIX through your bank. This way, you gain the convenience of having all of your financial instruments (for example your checking account, savings account, line of credit, and investments) with one institution. The problem is that banks tend to charge high fees, and despite this you don’t get the high level of advice that a good financial advisor offers. Unless convenience is the most important thing to you, other options are likely to be a better bet.
3. Use our top tips to be a successful investor
Before you invest in the CBOE Volatility Index, make sure to review these investing tips:
- Do your research. Go over the pros and cons of investing in the CBOE Volatility Index before investing your money. Having a sound investing plan ahead of time will improve your odds of success, and help you avoid emotions such as fear and greed that can cloud your judgment and decision-making ability.
- Set a budget. Set a budget that meets your financial and emotional tolerance for risk. If you invest more than you can afford to lose and your investment goes south, you could incur losses so large that it destroys both your confidence and your ability to afford future trades.
- Select the right platform. We’ve already reviewed some of the different trading platforms you can use to invest in the CBOE Volatility Index earlier on this page. Choose the method that works best for your investing needs, while considering important factors such as the relative size of transaction fees and the level of service your require.
- Grow your investments gradually. For beginner investors, it’s a good idea to start slow by investing a smaller amount of money in a CBOE Volatility Index investment. You can invest bigger dollar amounts as you gain more experience and expertise.
- Think short-term. With a typical stock index we would often encourage you to consider long-term investments, since a buy-and-hold strategy can be highly effective in a bull market. However, the VIX is a sentiment indicator that’s a far more volatile investment than something like the S&P 500, so in this case a short-term approach might make more sense, as you try to capitalise on big swings under extreme market conditions.
Here’s a list of our top 3 recommended brokers to invest in indices ETFs:
What should I do now?
Ready to invest? Great! Simply go to your chosen platform’s website, key in the ticker symbol of the investment asset you’re using to invest in the VIX, then click Buy.
Try some of our investment courses for beginners
Still not feeling ready to invest in the CBOE Volatility Index? That’s fine, you should never invest your money until you’re sure. Check out our easy-to-understand educational courses and news updates, right here on this site.