A Look at the Use of VIX Futures in Investment Portfolios: Buy-and-Hold versus Tactical Allocations

Abstract

This article demonstrates the general relationship of VIX futures, which trade on the CBOE Futures Exchange, to the underlying VIX index, as compiled by the CBOE, and how VIX futures might diversify and enhance a standard portfolio of equity and fixed income. The authors examine the use of VIX futures in a number of portfolio allocations over the period 2005-2009 and show that using VIX futures in a buy-and-hold strategy is not likely to be prudent in most scenarios. That does not indicate, however, that VIX futures should be disregarded completely. One beneficial use, examined here, uses VIX futures in a tactical manner that takes advantage of both the trend of the VIX futures as well as their tendency to increase when stocks decline. The key to these contracts is to understand how they trade, analyze them independently from the VIX index, and closely monitor their performance within any portfolio in which they are used. <b>TOPICS:</b>Performance measurement, portfolio construction, statistical methods