The Evolution of the Volatility Index Family Tree

In the beginning, there was the VIX. Eventually, the reach of the VIX was deemed too narrow and the volatility index universe was expanded to include the VXN, VXO, and a host of other volatility indices based on various U.S. equity indices. First an American phenomenon, volatility indices soon began sprouting up overseas, notably in the form of the German VDAX, but more recently reaching Asian shores with the April launch of the India VIX.

Having expanded geographically, volatility indices also recently began to expand the time horizon in which they evaluated volatility with the launch of the VXV, the 93 day version of the VIX.

In the last three weeks, the CBOE has started moving past equity-based volatility indices into commodity and currency volatility indices. The OVX (“Oil VIX”) was the first such effort. Last Friday the CBOE launched two new volatility indices:

• GVZ – CBOE Gold Volatility Index (“Gold VIX”), based on the GLD ETF
  
  
• EVZ – CBOE EuroCurrency Volatility Index (“Euro VIX”), based on the FXE ETF

The graphic below summarizes some of the highlights across the volatility index evolutionary timeline.

It remains to be seen whether the VIX branding and labeling will stick to oil, gold and the euro. Five years ago, the VIX label was transported from the S&P 100 (OEX) to the S&P 500 (SPX), but until the past few months there has been only one VIX. With the recent arrival of the India VIX, Oil VIX, Gold VIX, and Euro VIX, there is ample room for confusion about what exactly “VIX” means. On the other hand, “VIX” is really just shorthand for a generic “volatility index.” If this potential confusion can be overcome, the CBOE may have found a way to enhance and extend the most successful product and brand they have ever launched – and in the process dramatically change the volatility landscape.