The VIX is low. So what?

Volatility is not predictive of future returns.

September 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

• Some investors increase hedging when the VIX is low
• However, future returns were not negative when volatility was low
• Investors should also not be concerned about high volatility

INTRODUCTION

Since U.S. President Trump launched his tariff war in April 2025, equity markets have rebounded, valuations have returned to record highs, and the VIX has declined. This combination is making some investors uneasy, as tariffs are generally expected to weigh on economic growth. Concerns are further compounded by a lack of fiscal discipline of the U.S. government and the resulting upward pressure on U.S. interest rates.

In response, demand for defensive strategies has surged. Defined outcome ETFs, which aim to limit drawdowns during market declines, are experiencing strong inflows. U.S. asset managers have even gone a step further, introducing structured ETF products that provide 100% capital protection – naturally at the cost of reduced participation in market upside.

While it may seem intuitive to hedge against downturns using the VIX as a guide, we show in this research article why it is not an effective risk management framework.

IMPLIED VS REALIZED VOLATILITY

The VIX measures the implied volatility of a basket of short-term S&P 500 options. It tends to spike during sudden market crashes, but not necessarily during slow-moving bear markets such as in 2022. On average, the VIX closely tracks the realized volatility of the S&P 500, though it generally sits at a modest premium. This so-called variance risk premium can be harvested, but in practice it largely represents a diluted form of equity risk (read The Variance Risk Premium: What Premium?).