S&P Dow Jones Indices (S&P DJI), Japan Exchange Group (JPX) and Tokyo Stock Exchange (TSE) have joined efforts to launch of the S&P/JPX Risk Control Index (5%, 10% and 15%), the latest addition to the S&P/JPX Smart Beta Index Series, which was announced by S&P DJI, JPX and TSE in a strategic index agreement in October this year.
The S&P/JPX Risk Control Index (5%, 10% and 15%) applies S&P DJI's risk control framework to the Tokyo Stock Price Index (Topix) which consists of the Topix Total Return Index and a cash component based on the domestic interbank unsecured overnight call rate, with target volatility of 5%, 10% and 15%, respectively.
From a structured products perspective, the new risk control index provides an overlay on the risk of the benchmark which allows structurers to have a better handle of the option that they will embed in the product, said Vinit Srivastava (pictured), director, strategy indices at S&P Dow Jones Indices.
"Risk control indices are popular among structured products providers because the risk overlay makes the option cheaper which leaves more room to get exposure to the upside of the index," said Srivastava. "But this also depends on the type of structure and the risk overlay the structurer wants to apply to that product."
The launch follows a string of similar smart beta indices launched by S&P DJI recently, including the S&P 500 Low Volatility Enhanced Index and the S&P Europe 350 Buyback Dividend Stability Low Volatility Index which is part of the S&P Europe 350 series. There are 81 products on SRP's database linked to the S&P Europe 350 Low Volatility Index, mainly in Sweden (56 products) and Finland (18 products); 16 products linked to the S&P Europe 350 index; eight products linked to the S&P Europe 350 Risk Control ER Index, all of which were sold in Italy by Pioneer Investments; and seven products linked to the S&P Europe 350 Daily Risk Control 10% ER Index.
According to Srivastava, some clients prefer low vol indices as opposed to risk control indices. "Historically, low vol indices you reduce the overall volatility of the underlying index whereas the risk control indices enable investors to set up a specific volatility target in a particular product," said Srivastava. "Investors generally choose their strategy based on the goal of the product or the risk profile of the target market."
The S&P DJI has over $4bn AUM of outstanding products benchmarked to different risk control versions of S&P DJI indices; while low vol indices are also extremely popular "because they are very easy to explain by the provider and very easy to understand" by the end client, said Srivastava.
"We expect these two families of indices to remain popular in the structured products market," he said. "These overlays can be applied to any index and from that perspective we believe this segment will continue to grow. We will continue to develop this kind of overlay as we expand our index range or to res-pond to demand from clients."
According to the index agreement signed by S&P DJI, JPX and TSE, the S&P/JPX Smart Beta Index Series will be comprised of three cobranded benchmarks that combine smart beta index designs with risk-adjusted exposure.
The other two indices are the S&P/JPX GIVI (Global Intrinsic Value Index) which was launched earlier this year and the S&P/JPX Dividend Aristocrats Index. Under the agreement, TSE will cease the calculation and publication of the Topix Risk Control Index after the launch of S&P/JPX Risk Control Index.
S&P DJI is one of the leading providers of risk control indices to the global retail structured products market with over 500 products benchmarked to its low volatility and risk control benchmarks. The S&P's Aristocrats is also a popular family of indices in the structured products market and has been used in 61 structured products sold in the US market since 2010, SRP data shows. The most popular of these benchmarks is the S&P 500 Dividend Aristocrats Daily Risk Control 8% ER which is linked to 52 products sold by JPMorgan Chase in the US and one by Pioneer Investments in Italy, followed by the S&P 500 Dividend Aristocrats Daily Risk Control 10% ER with four products sold by Cantor Fitzgerald in Ireland and the S&P High Yield Dividend Aristocrats which has been featured in a basket of indices on two notes sold by Barclays in the US.
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S&P DJI teams up with Japan Exchange Group as Dow's popularity wanes
S&P adds Japan 500 GIVI Index to its smart beta line-up