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The VIX index refers to the Chicago Board Options Exchange’s CBOE Volatility Index, and it works in a different manner to most other indices. Instead of tracking the stock performance of a selection of companies – rising as their value goes up, and falling as their value goes down – the VIX measures the volatility of a selection of assets. Specifically it measures options related to the S&P 500 index, and is therefore used as an indicator of expected market volatility of the US stock market over the next 30 days.
This page will take you through a brief history of the VIX index, an indication of how it is composed, and your options for investing in the index.
The VIX index came into being in 1993, and was the brainchild of two Menachem Brenner and Dan Galai. These two figures had proposed an index known as the Sigma Index in their 1989 submission to Financial Analysts Journal, ‘New Financial Instruments for Hedging Changes in Volatility’.
Originally the CBOE Market Volatility Index (VIX) was related to the S&P 100 index, but in 2003 CBOE partnered with Goldman Sachs to introduce a new methodology and change the VIX into an index that reacted to volatility of certina options related to the S&P 500 index. Other innovations soon followed, such as futures trading being added to the VIX in 2004, and options trading soon after in 2006.
Given that the VIX index tracks market volatility rather than just stock price, it often has its best moments at a time when other indices are having their worst. For instance, the VIX index saw large spikes during the 2007/8 financial crash, during the 2020 oil dispute between Russia and Saudi Arabia, and throughout the crisis caused by the coronavirus pandemic.
As the VIX index functions differently from other indices, it doesn’t have a set of stocks that are listed. Instead what is more important is the methodology the VIX uses to determine its level, and the base index that it reacts to. Since 2003, the VIX index has been determined by a mathematical equation that tracks options on the S&P 500 index.
The easiest way to invest in the VIX index is to use a financial instrument called an exchange traded fund (ETF). A VIX ETF allows you to invest your money in relation to the performance of the VIX index, but still allows you the option of freely trading this investment on an exchange.
ETFs have become increasingly popular with investors in recent years because of the mixture of flexibility and diversification that they offer.