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What a Surging VIX Means for Stock ETFs

NEW YORK ( ETF Expert) -- On Friday, August 17, the CBOE S&P 500 Volatility Index, or VIX, hit a three-year low. Apparently, options investors had not been feeling a need to purchase "puts" to protect against a devastating decline in U.S. stock prices.

However, since logging a three-year low, the VIX has jumped roughly 25% (8/17/12-8/29/12). In the same time frame, the U.S. market has moved sideways (-0.4%).

The VIX essentially measures the level of "put" activity over a period of 30 days. With that knowledge, one can surmise that options investors fear the Federal Reserve won't signal a third round of quantitative easing, or QE3. At the very least, there are those who worry that the stock market won't react favorably to whatever Fed Chairman Bernanke says this Friday in Jackson Hole.

Equally worthy of note, the VIX is testing its short-term 50-day moving average. Technically speaking, a sustained breakout above this level could precede a pullback in the SPDR S&P 500 (SPY).

In truth, it is far too difficult to gauge what Bernanke will say or do in the next few days. Most agree that some form of QE3 is a foregone conclusion, but specifics may be left to our collective imagination until after the presidential election. (Then again, if a euro-zone flare-up or exceptionally poor series of economic data points send stocks into a tailspin, globally coordinated central bank action might occur sooner.)

In my client accounts, I have stayed with a steady diet of yield-oriented investments all year long. Readers are well-acquainted with my favorites, including but certainly not limited to: PowerShares Emerging Market Sovereign (PCY), iShares Preferred (PFF), Guggenheim Multi-Asset (CVY), iShares FTSE NAREIT Mortgage REITs (REM), Vanguard High Dividend Yield (VYM) and Vanguard Dividend Growth (VIG).

Granted, yield-oriented investments have a host of challenges ahead of them, from Fed decisions to tax policy to the possibility of rising rates. Still, as long as Treasury bond yields remain depressed, and as long as the economy muddles, the risk-reward for total return/income production is appealing.

More recently, I have added unlikely yield producers such as iShares MSCI Malaysia (EWM). The 3.7% annualized dividend is exceptionally desirable for a country with full employment, modest inflation and enviable GDP growth.
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PFF $39.02 0.37%
VYM $69.29 0.41%
PCY $28.51 0.04%
REM $10.06 1.40%
CVY $18.69 -0.16%


Chart of I:DJI
DOW 17,734.44 +73.73 0.42%
S&P 500 2,055.44 +4.81 0.23%
NASDAQ 4,726.6620 +9.5680 0.20%

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