Volatility diminishing, reveals S&P Dow Jones Indices report

Jul 24th, 2015 | By | Category: ETF and Index News

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ETF investors may be interested in research from S&P Dow Jones Indices, which broadly shows that volatility is diminishing across countries and asset classes, suggesting a more stable investment outlook.

S&P Dow Jones Volatility Report provides useful analysis for ETF investors

Tim Edwards, Senior Director, Index Investment Strategy, S&P Dow Jones Indices.

Tim Edwards, Senior Director of Index Investment Strategy at S&P Dow Jones Indices, commented: “In the last four weeks, another Greek crisis has come and been duly kicked down the road for a few more months; meanwhile the popping sounds emanating from China’s equity markets appear to have been nipped in the bud by the local authorities.”

He added: “With the exception of gold and oil, volatility everywhere is down – including notably our measures for Hong Kong and Europe. Apart from in Canada, volatility is low on an absolute basis, too; implied volatility in every equity market is below its trailing 200-day average.”

The following indices represent an annualised rate of perceived volatility within their underlying tracking market over the upcoming 30 days. This is derived from implied volatility resulting from traded put and call options on the underlying market.

The CBOE Volatility Index, a measure of implied volatility over the next 30 days in the S&P 500 Index, and therefore in those ETFs that track it such as the SPDR S&P 500 UCITS ETF, the iShares S&P 500 UCITS ETF (IDUS LN) and the db x-trackers S&P 500 UCITS ETF (XSPU LN), has fallen by 2.38 percentage points to 12.12, notably below its 200-day moving average of 15.40.

Similarly, the CBOE DJIA Volatility Index, a measure of implied volatility in the Dow Jones Industrial Average Index which is tracked by ETFs such as the iShares Dow Jones Industrial Average UCITS ETF (CIND) and the Lyxor Dow Jones Industrial Average UCITS ETF (DJEU LN), has fallen by 4.02 percentage points over the last month to a rating of 11.20, also considerably below the 200 day moving average of 14.81.

In international markets, decreasing volatility remained the theme. The Euro Stoxx Volatility Index, the S&P/ASX 200 VIX, the S&P/TSX 60 VIX, and the HSI Volatility Index, tracking implied volatility in the European, Australian, Canadian and Hong Kong in blue-chip equities, recorded drops in value of 1.77, 2.29, 1.70 and 0.89 percentage points respectively. The current values of these indices are 15.09, 12.42, 19.23 and 7.80. All of these indices except the Canadian S&P/TSX 60 VIX are now below their 200-day moving averages.

Volatility measures between the dollar and other major currencies also recorded significant decreases. The CBOE/CME FX Yen Volatility Index was down by 0.43 percentage points to 8.06, the CBOE/CME FX GBP Volatility Index fell by 1.65 percentage points to 11.02, and the CBOE/CME FX Euro Volatility Index decreased by 0.52 percentage points to 5.33. All three indices are now below their 200-day moving averages.

In the fixed income markets, there was a widening of spreads in credit-default swap indices for US corporates, indicating market perception of credit risk has increased. These index levels indicate the periodic cost to the debt holder of insuring the reference basket of bonds from default with a credit-insurer. The S&P/ISDA U.S. 150 CDS, a measure of implied credit risk for the 150 largest debt issuers on the S&P 500, increased marginally by 3.5 basis points (bps) to a spread of 70.5bps. The S&P/ISDA U.S. High Yield CDS, an equal-weighted index representing perceived credit risk of 80 high-yield debt issuers in the US, has increased by 29.5bps over the last month, landing the index at a spread of 334.0bps. There was a different story regarding international developed sovereign debt markets; the S&P/ISDA Intl Dev Sovereign CDS decreased by 4.2bps to an index level of 47.6bps.

Commodities remain broadly the only exception, with volatility in the gold and oil ETF markets remaining especially high. The CBOE Gold ETF Volatility Index and the CBOE Oil ETF Volatility Index rose by 6.01 and 4.83 percentage points respectively over the last month. These rises represent an annualised increase in expected volatility over the next 30 days of their underlying instruments, the US-listed Market Vectors Gold Miners ETF (GDX) and United States Oil Fund (USO).

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