The CBOE Volatility Index (VIX) in the U.S. surpassed the threshold of 50 earlier this week. While the markets remain unpredictable amid tariff war escalations, historical data shows that it makes sense to invest in the equity markets every time the VIX is over 50.
Between 1990 and 2025, the VIX has hovered over 50 on 38 occasions. Once the VIX is above 50, the average one-year return for the S&P 500 index is around 35%, while the average five-year returns are closer to 130%. Notably, the index has delivered positive returns on these 38 occasions, making the time ripe to gain exposure to equities at current valuations.
These returns suggest that periods of extreme market fear (VIX above 50) have historically presented exceptional long-term buying opportunities. The data indicates that investors who entered the market during these high-volatility periods and held positions for multiple years experienced significant cumulative returns, with the five-year returns averaging an impressive 129%.
This aligns with the contrarian investment philosophy that the best opportunities often emerge during maximum market stress and uncertainty.
So, let’s see where you should invest $7,000 during the current market pullback.
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Invest $5,000 in the XSP ETF
Most of your equity investments should be allocated toward low-cost funds that track indices such as the S&P 500. One such exchange-traded fund is iShares Core S&P 500 Index ETF (TSX:XSP). With more than $10 billion in assets under management, the XSP ETF is hedged to the Canadian dollar, shielding you from fluctuations in exchange rates.
The ETF was launched in May 2010 and offers exposure to some of the world’s biggest companies, including Apple, Microsoft, Tesla, Nvidia, Alphabet, Amazon, and Meta Platforms.
A $5,000 investment in the XSP ETF would be worth close to $20,280 today. If we adjust for dividend reinvestments, cumulative returns are closer to $26,700.
Invest $2,000 in cheap TSX stocks
Canadian investors can consider allocating $2,000 to quality TSX stocks trading at a lower multiple, such as EQB (TSX:EQB). Valued at a market cap of $3.5 billion, EQB provides personal and commercial banking services to retail and commercial customers in Canada.
Since its initial public offering in 2004, EQB stock has returned around 1,000% to shareholders in dividend-adjusting gains. Despite these outsized returns, the TSX stock is down 20% from all-time highs and offers you a dividend yield of 2%.
Today, EQB is Canada’s seventh-largest bank and is seeing stronger-than-expected mortgage application flows in fiscal year 2025 despite looming economic uncertainties. EQB’s chief executive officer, Andrew Moore, outlined the bank’s capital management strategy, revealing it currently holds a 14.2% common equity tier-one ratio with $400 million in surplus equity that can be deployed over the next two to three years.
While organic growth remains the priority, Moore indicated that expansion into credit cards and wealth management could be potential avenues for capital deployment, noting that EQB is “the largest bank in the country with no offers in either of those two spaces.”
When questioned about the bank’s specialty mortgage business, which includes a higher proportion of self-employed borrowers, Moore expressed confidence in the resilience of this customer base. Moore also highlighted the bank’s growing reverse mortgage portfolio, now at $2 billion, primarily serving seniors wanting to “age in place” rather than downsize or move to assisted living facilities.
Analysts tracking the bank stock expect adjusted earnings to grow from $11 per share in fiscal year 2024 (ended in October) to $15.59 per share in fiscal year 2027. So, if the TSX stock trades at 12 times trailing earnings, it should more than double over the next three years.
