Newly-launched Dynamic VSTOXX Indices licensed to Barclays
Stoxx’s newly launched Dynamic VSTOXX and Dynamic VSTOXX Net Of Costs indices have been licensed to Barclays.
The new indices provide an enhanced exposure to European volatility through the VSTOXX futures by applying a dynamic allocation strategy aimed at identifying the most rewarding – and yet at the same time less risk-prone combination of short- and mid-term futures.
The Dynamic VSTOXX and Dynamic VSTOXX Net Of Costs indices follow an “index of indices” concept, meaning their value is calculated based on the value of the underlying indices, the Euro Stoxx 50 Volatility Short-Term Futures (VSTOXX Short-Term Futures) and Euro Stoxx 50 Mid-Term Futures (VSTOXX Mid-Term Futures) indices.
The weights of the underlying indices are rebalanced dynamically in the Dynamic VSTOXX and Dynamic VSTOXX Net Of Costs indices.
Both indices follow the exact same index concept, however, the Dynamic VSTOXX Net of Costs Index additionally accounts for average market costs which are typically associated with the replication of an index for a financial product. All costs are clearly identified in the index formulae, ensuring transparency for market participants.
“The newly launched Dynamic VSTOXX and Dynamic VSTOXX Net Of Costs indices offer market participants the possibility to diversify their portfolio by adding exposure to VSTOXX futures,” says Hartmut Graf (pictured), chief executive officer, Stoxx. “Through the dynamic weight allocation between the two underlying VSTOXX Short- and Mid-Term Futures indices, which ranges from short to long positions, the index adapts to high and low volatility regimes in the European market.”
"These new indices cater to the demand we've seen from investors looking to mitigate some of the downside risk of investing in many assets, whilst still wanting to reduce the cost of carry when conditions are more benign. The Dynamic VSTOXX indices may appeal to a wide selection of investors who like the negative correlation of the VSTOXX with equity markets, but who also want the longer-term hedge that these indices offer, rather than trying to time the volatility market,” says Benedict Redmond, director, Barclays.
The Dynamic VSTOXX and Dynamic VSTOXX Net Of Costs indices are based on the VSTOXX Short-Term Futures and VSTOXX Mid-Term Futures indices. These replicate a hypothetical portfolio which measures the returns from a rolling investment made into two VSTOXX futures contracts traded on Eurex with a remaining maturity of one and two months and four VSTOXX futures with a remaining maturity of four, five, six and seven months, respectively.
The weight of the VSTOXX Short-Term Futures and VSTOXX Mid-Term Futures indices in the Dynamic VSTOXX and Dynamic VSTOXX Net Of Costs indices is adjusted on every index rebalancing day, which occurs at irregular intervals, but can happen as frequently as daily. The allocation of weight to each of the underlying indices is triggered by a trading signal, which is calculated as the ratio of the closing values of the VSTOXX and VSTOXX 120 Days indices: a higher ratio level corresponds to a higher weight of the VSTOXX Short-Term Futures Index in the Dynamic VSTOXX Index, while a lower ratio leads to a higher weight of the VSTOXX Mid-Term Futures. The maximum change in exposure to one of the underlying indices in one day is capped at five per cent.
Both the Dynamic VSTOXX and Dynamic VSTOXX Net Of Costs indices are available in three different versions: Alpha, Long-only and Standard. While the alpha version allows a short exposure to the VSTOXX Short-Term Futures of up to -50 per cent, the standard versions limits this to -30 per cent. In the long-only version, any short exposure to the underlying index is prohibited. For each index version, a specific conversion matrix allows to convert the trading signal into allocation weights for the VSTOXX Short-Term Futures and VSTOXX Mid-Term Futures indices.
The Dynamic VSTOXX and Dynamic VSTOXX Net Of Costs indices are calculated in Euro. All index versions are available in real-time.