The Volatility Index (VIX), often referred to as the “fear gauge,” measures market volatility and is a popular tool for investors looking to hedge their portfolios or profit from uncertainty. While Australian investors can’t directly invest in the VIX through the ASX, there are alternative ways to gain exposure to volatility using global financial markets and local exchange-traded products (ETPs).

Here’s a guide on how Australian investors can approach investing in volatility.

What Is the VIX?

The VIX measures the expected 30-day volatility of the U.S. S&P 500 Index. When the VIX rises, it indicates higher expected market volatility and increased uncertainty, often linked to market corrections or crashes. While the VIX itself isn’t tradable, there are several financial instruments that track it or its futures, allowing investors to gain indirect exposure to market volatility.

1. Investing in ASX-Listed ETFs with Volatility Exposure

While there aren’t any VIX-specific ETFs listed on the ASX, Australian investors can access international markets by investing in ASX-listed ETFs that provide exposure to the U.S. market. These ETFs may not track the VIX directly, but they are influenced by market volatility and can be useful for hedging.

• BetaShares U.S. Equities Strong Bear Hedge Fund (ASX: BBUS): This ETF is designed to provide a magnified inverse return of the U.S. S&P 500. As U.S. market volatility increases and the S&P 500 declines, this ETF generally rises in value. It’s an option for Australian investors looking to profit from short-term U.S. market volatility.
• BetaShares Australian Equities Bear Hedge Fund (ASX: BEAR): This ETF offers exposure to falling Australian equities. Although it doesn’t directly track the VIX, increased market volatility typically corresponds with market declines, making this product useful during volatile periods.

2. International ETFs and ETNs via Australian Brokers

Many Australian online brokers provide access to international exchanges, where investors can purchase volatility-related ETFs or ETNs listed on the U.S. markets. These products track VIX futures and provide a more direct route to volatility investing.

• ProShares VIX Short-Term Futures ETF (VIXY): Tracks the VIX futures market, providing exposure to short-term changes in volatility.
• iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): An exchange-traded note that tracks VIX futures, allowing investors to speculate on short-term volatility.

These international ETFs can be accessed through brokers like CommSec, NabTrade, or Interactive Brokers, which allow Australians to trade U.S.-listed products.

3. Trading VIX Futures

While Australian investors can’t trade VIX futures on the ASX, they can still access these markets through global brokers that offer futures trading. VIX futures contracts are traded on the Chicago Board Options Exchange (CBOE) and provide direct exposure to expected volatility.

Trading VIX futures is a complex strategy and involves significant risk. Futures are often leveraged, meaning that small movements in volatility can result in significant gains or losses.

4. Using Inverse ETFs as a Volatility Hedge

In Australia, there are several inverse ETFs that allow investors to profit from falling markets, which often coincide with rising volatility. While these funds don’t track the VIX, they can be used as a hedge against market downturns, which typically occur during periods of high volatility.

• BetaShares Australian Equities Bear Hedge Fund (ASX: BEAR): Offers inverse exposure to the Australian stock market, meaning it rises in value as the ASX falls. Although this doesn’t directly correlate with the VIX, it’s a useful tool for hedging against rising volatility.
• BetaShares Strong Bear Hedge Fund (ASX: BBOZ): Similar to BEAR, but provides a magnified inverse return on the Australian share market, making it more sensitive to market declines and volatility.

5. Understanding the Risks of Volatility Investing

Investing in volatility-related products, especially through international ETFs or futures, involves unique risks that Australian investors should be aware of:

• Contango Risk: Many VIX-related ETFs and ETNs are based on futures contracts, which can suffer from contango—when the futures price is higher than the spot price. This can lead to decay in the value of the investment over time, even if the VIX doesn’t fall significantly.
• Short-Term Focus: VIX ETFs and futures are designed for short-term trading strategies. Holding these instruments long-term can lead to significant losses due to contango and other structural issues.
• Leverage Risk: Many products that track the VIX are leveraged, meaning that they amplify both potential gains and losses. This can make them highly volatile and unsuitable for inexperienced investors.

6. Using Volatility as a Hedge

Volatility-related investments can be a useful tool for hedging a portfolio. Since the VIX tends to rise when equity markets fall, these instruments can offset losses during times of extreme market stress. For example, an investor concerned about a market downturn could allocate a portion of their portfolio to inverse ETFs like BEAR or BBUS to hedge against potential losses.

Conclusion

While Australian investors can’t directly trade the VIX on the ASX, there are several ways to gain exposure to market volatility through ETFs, inverse ETFs, and international ETFs that track the VIX. These tools can provide protection during periods of high uncertainty and help diversify a portfolio. However, it’s important to approach volatility investing with caution, as these products are typically suited for short-term trading rather than long-term investing.

Investing in volatility is a complex strategy, and understanding the associated risks—especially contango and leverage—is crucial. By using ASX-listed products and international exposure, Australian investors can effectively incorporate volatility into their investment strategies to hedge against market uncertainty.