The Cboe DJIA Volatility Index (VXD) measures anticipated volatility in the Dow Jones Industrial Average (DJIA) over the next 30 days. Like the other volatility indices for their respective indexes or markets, the VXD is seen as the “fear gauge” for blue-chip stocks. It gives investors insight into sentiment about the large, established companies that comprise the DJIA. The VXD calculates expected volatility by analysing options on the DJIA.
Like its counterpart the VIX, the VXD will rise during periods of market turbulence or economic uncertainty and fall when the market stabilises.
For example, the VXD typically spikes when unforeseen events occur, such as major economic announcements, significant geopolitical issues, or global crises, making it a useful indicator of perceived risk within the blue-chip sector. The COVID-19 pandemic was a prime example, with the VXD spiking significantly in March 2020.
The VXD, which was launched by the Chicago Board Options Exchange (Cboe) to offer a volatility benchmark for the Dow Jones, has, over time, become an important measure for investors monitoring the sentiment of the DJIA, similar to how the VIX is used for the S&P 500.
Of course, the VXD is not directly investable, but investors can assess the various volatility ETFs available.
VXD Levels & Historical Trends
High: 80.24 (September 30, 2008)
Low: 2.47 (December 31, 2019)
Average: 18.15
The VXD high occurred in September 2008 when Lehman Brothers filed for bankruptcy as a result of the Global Financial Crisis.
How the VXD Works
The Cboe DJIA Volatility Index measures expected volatility in the Dow Jones Industrial Average by tracking option prices on the DJIA. Specifically, the VXD calculation includes both near-term and next-term options—put and call options with 23 to 37 days until expiration. This range is seen as the best to capture market expectations of volatility in the coming month. When there is increased demand for these options, typically due to greater uncertainty about the DJIA’s future movements, the VXD will rise.
On the other hand, when the market outlook appears stable and investor sentiment is calm, demand for these options tends to decrease, leading the VXD to fall. As it is a forward-looking indicator, the VXD offers insights into volatility expectations, helping investors anticipate potential risks.
However, it’s important to note that while the VXD reflects market volatility expectations, it does not predict the direction of stock prices, serving instead as a gauge of anticipated market turbulence.
VXD: Factors to Watch
The recent US election, which was won by Donald Trump, saw a slight rise in volatility, although there wasn’t a significant increase, with many believing a Trump win was already priced into markets. Nevertheless, new policies, tariffs, and geopolitical tensions could all result in a rise in DJIA volatility. For example, Minneapolis Federal Reserve President Neel Kashkari recently commented that tariffs, which are paid by companies looking to import products into the country, could worsen long-term inflation. This may, in turn, result in market volatility.
Of course, this may already be accounted for. In addition, it’s important to be aware that significant spikes in volatility can arise out of the blue. However, there are still factors to keep an eye on.
In the DJIA, companies with larger stock prices have a more significant influence on the index than companies with lower prices. As a result, abig increase or decrease in one company’s stock price can have a strong impact on the index, resulting in volatility.
Furthermore, unexpected moves by the Federal Reserve, or surprises in economic data, such as a significant rise in unemployment, can also impact DJIA and general US market volatility.
Who Uses the VXD
The VXD is valuable for various types of investors:
Portfolio Managers: Use the VXD to hedge against volatility in blue-chip stocks using options or futures.
Institutional Traders: Track the VXD to gauge sentiment and assess market risk within the Dow.
Risk-Averse Investors: Monitor the VXD to adjust exposure to blue-chip stocks during periods of increased uncertainty.
Market Analysts: Use VXD movements as an indicator of sentiment changes in large-cap stocks.
