Can the VIX Cushion Your Portfolio?

That’s a strategy Ben Levisohn explores in the article A Four-Month Rally: Time to Protect Profits?.

A Merrill Lynch study shows that allocating 10% of a portfolio to the index underlying the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) while keeping the balance in the S&P 500 would have gained 5.6% per year since December 2005 versus a 3.7% annualized gain for the S&P 500 alone.  That strategy would have also lowered volatility over the same time period.

Levisohn points out that a VIX cushion doesn’t necessarily work in the short term.  For example, in 2010 a 10% allocation to the VIX ETN would have lowered portfolio performance by 1.4%.

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