S&P regains top spot for underlyings in the US

June saw the S&P 500 regain the top spot in terms of sales volume in the US structured products market after three months of coming in second place behind the Eurostoxx 50 index. The US benchmark was the underlying for 98 products issued in June, adding up to a total of $729m, up 23% from May’s sales. Meanwhile the European benchmark was used in 82 products worth a total of $686m, a drop of 12% from last month.

Last month the Eurostoxx 50 became the base asset with the highest sales volume this year for the first time in the US, a position that the European underlying still holds with $4.4bn in sales at the end of June, compared with the S&P 500’s $4.15bn.

“The S&P 500 index will remain an underlying of choice for many providers and investors but we see other indices pricing well and providing much needed diversification,” said Fabrice Hugon, senior managing director of structured products at Elkhorn Securities. “The US market has been in a bull run since the crisis, and indices such as the Eurostoxx50 can provide diversification for investors.”

Elkhorn, said Hugon, is developing a range of strategic indices aimed at providing “something different that adds value to investors”.

Year to date, the S&P 500 has been featured in 552 products which represents 10% of the overall issuance while the Eurostoxx 50 index followed closely behind with 508 products and 9% of the overall issuance. The Russell 2000 came third having been featured in 254 products which represents 5% market share.

Continuing uncertainty about the economy of Greece and its inclusion in the euro as well as speculation about when the US Federal Reserve will increase interest rates have driven much of the activity in the US market. Now with the situation in Greece coming to a head, it is anyone’s guess what will happen and what the effect will be on the European and the global economy.

June also saw a spike in S&P 500 volatility, bringing it up to levels not seen since the beginning of the year. This results in more attractive pricing and the ability to structure more appealing products. US investors’ response to that uncertainty has been to invest their money at home, where they are more familiar with the terrain.

“Since most of the structures we are printing are being sold to numerous accounts we find broad based indices typically get more traction than single stocks or even commodities, said Deryk Rhodes (pictured), managing director, head of Incapital’s structured products origination & trading desk. “This is due to the fact that investors utilize broad based indices as more of a core allocation.”

According to Rhodes, a majority of Incapital’s single stock trades are reverse inquiry driven. “The Russell 2000 and Eurostoxx 50 both price up well versus the S&P 500 so we have always had steady demand for both of these indices,” he said. “However, the S&P 500 is certainly the most recognizable index and many clients just getting involved in structured products typically favour this index. Rather than any one index gaining additional ground what we have seen is a larger number of trades printing that are tied to two or more indices.”

Capped calls with an enhanced tracker have been the structure of choice among investors, with 30 products worth a total of $358m being issued during the month. About half of those products feature some type of downside protection, either in the form of a barrier or a buffer. The average upside leverage for these products is 218%, ranging between 120% and 300%. The average cap to the upside of these products is 120%, ranging between 110% and 164%.