Election-Year Market Jitters Start to Show, Despite Ongoing Stock Rally

Volatility futures that settle around Election Day are 37% more expensive than those settling in April.

You might think from the ongoing stock rally and the relatively benign behavior of the VIX Index, Wall Street’s so-called “fear gauge,” that all is well in the markets. After all, the VIX, which tracks the volatility of the S&P 500 stock index, has been mostly flat since late last year.  

But there’s more to the story. Since you can’t invest in the VIX Index directly, professional traders take positions through futures contracts. And futures contracts settling around Election Day are now 37% more expensive than those settling in April. 

According to the CBOE, which runs the market for futures on the VIX, the cost of a contract settling in mid-April was about 15.15 on April 8. (The actual dollar cost of it is a multiple of that.) 

It rises to 18.11 for contracts settling in mid-September and hits 20.82 for the last contract to settle before the election, the one in mid-October.  

With the VIX Index trudging along at about 13 since the beginning of the year, ETFs that try to track it, like the ProShares VIXY ETF, don’t look too compelling. 

The steep contango in the VIX futures market makes ETFs based on short-term futures look even less appealing. (A market is in “contango” when the price of contracts settling in the future is higher than the price of those settling in the near term.) Just rolling monthly futures forward from now until October will cost a fund a total of 5.60. 

If the VIX rises sharply over the same period, those costs could be outpaced by gains from the index. If not, however, VIX ETF portfolio managers will have some difficult decisions to make – and some disgruntled investors to placate.