While most investors focus on stock market performance, it is also possible to bet on expected market risk using instruments tied to the CBOE Volatility Index, or VIX. Long VIX positions are essentially a bet on higher market risk, which often coincides with poor market returns. Conversely, being short the VIX conveys a view of lower expected market risk and higher market returns.
In recent years, it has paid off to bet against market risk. A dollar invested in December 2010 in a VIX exchange-traded product that bet against market volatility would be worth $9.38 as of this writing. This phenomenal return can be attributed to the stock market climbing steadily higher with lower volatility than expected.
Adam McCullough, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.