Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why Low Volatility Stocks Outperform When the VIX Is Lying
Transcript
- Lucas: So the VIX closed today at 15.83. Down about four and a half percent over the last five days. That's low — historically, the median VIX is around 17 or 18. But here's the thing: the VIX is not telling the whole story. Luna: You're looking at the VVIX, aren't you? The volatility of volatility. Lucas: Exactly. The VVIX is at 87.20 today. That's actually up a bit over the last week, and it's well above its own median. So you've got the VIX saying 'everything's fine', and the VVIX saying 'actually, options traders are paying up for tail risk'. That's a divergence we haven't seen this wide since early 2020. Luna: And that's exactly the kind of setup that punishes people who blindly buy the dip in the Nasdaq. The VIX is low, so they think it's safe. But the VVIX is saying 'nope, the next move could be violent.' Lucas: Right. And we've seen this pattern before. In late 2018, the VIX was hovering around 14, VVIX was elevated, and then BAM — Q4 correction hit. The VIX spiked to 36. So the question is: what do you do with this signal? The answer, I think, is to focus on stocks with low realised volatility. The ones that don't move much even when the market shakes. Luna: You're talking about utilities, consumer staples, healthcare — the defensive sectors. They've actually been quietly crushing it. The S&P 500 Utilities Index is up about 15 percent year-to-date. Compare that to the Nasdaq, which is basically flat. Lucas: And it's not just utilities. Jefferies put out a note today saying 'buy quality, low-stress stocks for the summer.' Their screen includes low beta, low debt, high return on equity. Names like Procter & Gamble, Coca-Cola, waste management companies. The kind of stocks you can own and not check every hour. Luna: So the play isn't to hide in cash. It's to rotate into stocks that have lower sensitivity to the VIX itself. Which makes sense — if the VIX is artificially low, the stocks that benefit most from calm conditions have already run. Meanwhile, the boring names still have room. Lucas: Let me put a number on that. The S&P 500 Low Volatility Index has returned about 12 percent total return this year. The S&P 500 itself is up about 7 percent. So the low-vol factor is outperforming by roughly 5 percentage points. And that's after the VIX dropped from the mid-20s to today's level. The outperformance has actually accelerated. Luna: So the VIX is low, but the VVIX is high. That's the core insight. And the best hedge isn't options — it's owning stocks that don't need a hedge. Lucas: And that's exactly where we are. The 10-year Treasury yield today is 4.49 percent — that's up slightly from last week. So bonds aren't screaming recession. But they're also not screaming growth. The yield curve is still inverted at 35 basis points on the 10-year minus 2-year. That's a classic warning signal. Luna: Combine that with a low VIX that might be lying and a high VVIX, and the message is: prepare for something, but don't know what. Lucas: Which is why low-vol stocks are the play. They tend to hold up in corrections and still participate in rallies. Over rolling three-year periods, the low-vol factor has a higher Sharpe ratio than the broad market in about 80 percent of historical windows. It's not timing — it's structural. Luna: And it's a conversation I think many investors miss. They see the VIX at 15 and think 'buy the dip in tech.' But the VVIX says 'be careful.' The divergence is a real flag. Lucas: You know, when we started this podcast back in March, we talked about the danger of assuming the VIX tells you everything. And honestly, hearing people say today's show helped them think about a decision differently — that's what keeps this going. If today's episode was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. Zero pressure, but it's the only reason we keep these episodes free. Luna: Yeah, and it's literally the price of a coffee. Not a subscription, not a pledge. Just a little nod if you found value. We really appreciate it. Lucas: Alright. So back to the data. The VVIX at 87 — that's the 70th percentile of its own history. It's not screaming like 150, but it's elevated. Historically, when the VIX is below 16 and the VVIX is above 85, the S&P 500 has delivered negative returns over the next month about 65 percent of the time. That's a meaningful edge. Luna: And that's the edge you're exploiting by going low-vol, not by going to cash. Lucas: Exactly. So here's a concrete portfolio move. If you're sitting on a tech-heavy allocation, consider trimming some of the high-beta names — the stocks with beta above 1.5 — and moving into a low-vol ETF like SPLV or USMV. Those are up this year, but they're not overextended. Luna: And the beauty is, you don't have to predict the next crash. You're just aligning your portfolio with the signal the options market is actually sending, not the one the VIX alone shows. Lucas: Right. The VIX at 15.83 is a seductive number. It whispers 'buy the dip.' But the VVIX at 87 is shouting 'buy the insurance.' And the cheapest insurance right now might just be a low-vol stock. Luna: Great angle. I think that's a really actionable takeaway for listeners. Lucas: Next week, we'll dig into the yield curve again — because the 10-year at 4.49 and the 2-year at 4.14 keeps that spread narrow. But for today, the message is simple: don't trust the low VIX. Trust the VVIX instead.