S&P Dow Jones launches S&P Emerging Markets Low Volatility Select index aimed at structurers

By Emma Trincal

New York, Nov. 24 – S&P Dow Jones Indices announced on Monday the launch of the S&P Emerging Markets Low Volatility Select index, adding to its family of low volatility and factor indexes, according to a press release.

The new index is licensed to Commerzbank.

Vinit Srivastava, senior director, index strategy at S&P Dow Jones Indices, told Prospect News that his firm hopes other issuers will follow suit soon.

“We’ve licensed it to Commerzbank in Europe. They were looking to create a product on it,” he said.

“The characteristics of this index make it very attractive for structurers. We have just announced the launch of the new index today. We think we should get the attention of U.S. structurers,” he added.

The S&P Emerging Markets Low Volatility Select index is an investable index that measures the performance of the 50 least volatile stocks within the S&P Emerging Plus LargeMidCap index.

Amongst the 50 stocks, those with the least volatility receive the highest weights in the new index, which is rebalanced quarterly.

Liquidity

One of the main appeals of this index for structuring desks is its greater liquidity, Srivastava explained.

“Some firms want to do structured notes on emerging markets, but the broader index that we have is very difficult to trade,” he said, referring to the S&P Emerging Plus BMI index.

The S&P Emerging Markets Low Volatility Select index imposes more stringent liquidity requirements, he said, adding that stocks with a trading volume below $7 million cannot be included in the broader index while the threshold is only $3 million with the broader index.

“This new index is a more liquid version of the prior one,” he said.

A more liquid index is easier to hedge for structurers and therefore facilitate the pricing of structured products, sources said.

The S&P Emerging Markets Low Volatility Select index doesn’t include shares of companies domiciled in Africa, at the exception of South Africa, he said. India, Latin America, Middle-East and Russia are also excluded from the index. China is excluded, but Chinese companies listed in Hong Kong are not.

While the first use of the new index will be for a European-based structured product, Srivastava said that he is confident the new underlying index will garner interest among U.S. firms as well.

“A lot of time, an index will begin as a one client licensing agreement like Commerzbank here. We talk to a client. They’re interested. They license it. It’s always good to have a client at launch. But once other firms see it, they may be interested in using it as well and that’s when they call us.”

Low volatility, access

Another reason for the expected use of the index in future structured notes is the low volatility screening applied to an asset class that has scared a lot of investors due to its poor performance.

“We have observed a growing demand for emerging market exposure from our clients across the world,” Raphael Rollin, equity derivatives product engineering, Commerzbank corporates & markets, said in the press release.

“However, the high volatility associated with these markets can make derivatives investments costly. In our view, the S&P Emerging Markets Low Volatility Select index addresses our clients’ needs, by delivering an enhanced performance and nearly halving the volatility compared to traditional benchmarks, meaning the index should serve as a strong basis for a cost efficient derivative exposure to emerging market countries.”

The one-year total return of the new index is 4.43%, compared to 2.28% for the S&P Emerging Plus BMI, according to back testing figures listed on the S&P Dow Jones Indices website.

The performance of the S&P Emerging Plus LargeMidCap index, which is the source of the new index is not listed on the website but the S&P Emerging Plus BMI index makes for a good proxy of its performance, Srivastava explained.

For the past three years, the new index showed a total return of 11.03% per year versus 4.51% for the S&P Emerging Plus BMI. The five-year performance is 13.50% for the low volatility index versus 5.79% for the broader, BMI version.

While sellsiders may like the attributes of the new index, ultimately its use in notes will be a function of the market, Srivastava said.

“It will depend on investors’ appetite for emerging markets, an asset class that has significantly underperformed the U.S. market,” he noted.

“If it’s completely out of favor, it will be very difficult for sellsiders to get any demand for it. But if we do see some interest, it’s clear that the best way to access the asset class will be through a low volatility product, whether it’s an ETF or a structured note.”

S&P Dow Jones is part of New York-based McGraw-Hill Cos., a resource for index-based concepts, data and research.

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