A Call for Help From Down Under

Since the Australian Securities Exchange is planning on launching volatility futures on the S&P/ASX 200 VIX I was invited to visit the financial community in Melbourne and Sydney this week.  I am about half way through my tour and on Tuesday afternoon I spoke to about 50 investment professionals in Melbourne yesterday.  There seems to be strong interest in using volatility as a tradable asset and there were several good questions from the attendees.  A question that stumped me a little and put me to work was, “You have told us that there is an inverse relationship between VIX indexes and their markets are there any markets that VIX is correlated with?”  I have a love / hate relationship with questions like this.  I hate that I don’t have a good answer off the top of my head, but I love that it gives me something to work on.

My first thought was gold, back in the day it would often rally when the stock market came under pressure.  This was the result of some sort of flight to quality or flight to safety.  That’s a logical thought, but an incorrect one.  Using the SPDR Gold Shares ETF (GLD) as a gold price proxy I compared the price of gold to VIX from 2005 through May 31, 2013 and the correlations are basically random.  I even did it by year to see if they use to be correlated and the answer is no.   The table below breaks down the correlation by year of daily price changes for GLD and VIX.

GLD-VIX Correlation

I then used a website I use to frequent during my pair trading days (www.impactopia.com) and looked for markets that have an inverse relationship with SPY.  I know this is an unusual approach, but this site does not allow you to input an index, only stocks and ETFs.  Of course I had to weed out all the inverse ETFs, but then came across some fixed income related funds.  After cutting pasting and wearing out Excel the best correlation I found for VIX was the ProShares Ultra 20+ Year Treasury ETF (UBT – 62.39).  This fund has been around since January of 2010 and the correlation of daily changes relative to VIX is +0.5222.  After an hour or so of playing with numbers that’s the best I could find.  The chart below shows the daily prices of UBT versus VIX over this time period.


So here’s the deal.  I need some help on tracking down a market or ETF that has a high correlation to VIX.  Whoever can come up with the best highly correlated market with VIX that is not a volatility market will get a thing or two from The Options Institute’s swag closet.  The deadline is this coming Sunday which is when I will be back in Chicago and hopefully reoriented to central time.   Let the search begin….submit findings to rhoads@cboe.com