Volatility Indexes: A Barometer for Market Direction
It’s no secret that accurately predicting daily share market movements is virtually impossible. However, while there’s no crystal ball, numerous global indexes have been developed to measure expected volatility across various asset classes, regions, and even individual securities.
These volatility indexes—many of which are tradeable via specialized exchange-traded funds (ETFs)—serve as forward-looking indicators of investor sentiment. Below are some key volatility tracking indexes, including Australia’s own, that traders and investors closely monitor.
The U.S. "Fear Index" – VIX
The most well-known volatility gauge is the VIX, or the CBOE Volatility Index. Often dubbed the U.S. market’s “fear index,” the VIX reflects real-time expected volatility based on S&P 500 options due to expire within the next 30 days. Significant price swings in these options suggest anticipated market turbulence.
For instance, a VIX reading of 20 implies an expected annualized volatility of 20% over the next month. Higher readings signal increased uncertainty, while lower readings suggest market calm. On 7 April, the VIX spiked to 60.13 following sudden U.S. tariff announcements—a level not seen since the COVID-induced surge to 82.69 in March 2020. The all-time intraday high remains 89.53 from the 2008 Global Financial Crisis.
Australia’s Volatility Index – A-VIX
Australia’s counterpart, the S&P/ASX 200 VIX (A-VIX), mirrors the VIX’s methodology, tracking 30-day expected volatility in options on the S&P/ASX 200. Like the VIX, a higher A-VIX reflects expectations of larger market moves, typically inversely related to the equity market’s direction.
In April, the A-VIX echoed the U.S. VIX’s surge, reflecting concerns over American trade policy ripple effects on Australian markets.
The Skew Index – Black Swan Indicator
The CBOE Skew Index gauges the perceived risk of extreme market downturns—so-called “Black Swan” events. It measures demand for protective options; a higher index level indicates increased hedging activity against potential market shocks.
Currently, the Skew Index suggests traders foresee moderately low short-term volatility compared to earlier spikes in late 2024.
Does Tracking Volatility Matter?
Volatility indexes provide insight into market sentiment but cannot forecast market direction. For long-term investors, short-term volatility should hold limited relevance.
Historical data confirms that while volatility can affect short-term returns, it has minimal influence on long-term performance. This is illustrated by the Vanguard Index Chart (1 May 2015 – 30 April 2025), showing the trajectory of a $10,000 investment across various asset classes. Despite events like the COVID-19 crash, long-term investors achieved growth through market recovery and compounding returns.
While volatility can be unsettling, successful investing hinges on a diversified, goal-aligned strategy—and the discipline to remain invested through turbulent periods.
Rick Maggi CFP, Financial Advisor Perth, Westmount Financial
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Disclaimer
This article has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.