Benchmarks For VIX-Tracking ETNs Ready To Go

January 22, 2009

New S&P benchmarks make tracking direction of market volatility an investable option.

With two new exchange-traded notes tracking marketvolatility still in registration, the benchmarks for those proposed funds arenow out.

On Thursday, the S&P 500 VIX Futures Index serieswas launched. The suite ofinvestable benchmark replicates various subsets of the CBOE Volatility Index,or VIX. It has proved to be a popular means for large investors to hedgeportfolios since the VIX essentially serves as a monitor of the impliedvolatility of the S&P 500's options activity.

The new VIX indexes solve a tricky issue that few havebeen able to overcome. While two index providers in Europe have in recent yearscome out with similar benchmarks, only one other has been offered in the U.S.And that one was for tracking options activity in high-yield bond markets.

The new S&P VIX series will at the very leastprovide a greater degree of coverage for U.S. investors interested in hedgingagainst volatility in their bond portfolios. A pair of iPath ETNs is stillmoving through the regulatory phase, but could come out in the near-future.(See related story here.)

Just like the ETNs, the S&P VIX indexes arenamed according to the particular average maturity of the futures contracts intheir lineups. The benchmarks are:

  • The S&P 500 VIX Short-Term Futures Index, which measures the daily returns in first- and second-month VIX futures contracts. Its aim is to maintain an average maturity of one-month.
  • The S&P 500 VIX Mid-Term Futures Index does much the same. But it measures daily returns of fourth-, fifth-, sixth- and seventh-month VIX futures contracts. The mid-term benchmark shoots for an average five-month maturity profile. 

"Indicescomprised of futures contracts have been valuable in broadening access toalternative assets where the spot is difficult to trade. We expect the S&P 500VIX Futures Indices to do the same for volatility," said SrikantDash, global head of research and design at Standard & Poor's, in a statement.







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