Natixis targets ‘long-only’ and ‘yield seeking’ investors in the US

Natixis has licensed the S&P 500 Low Volatility Target Beta Index for product development. The newly launched index is designed to track the S&P 500 Low Volatility Index while maintaining the same level of market risk as the S&P 500.

The index is a simple illustration of a dynamic exposure strategy applied to a growing investment theme, in this case the low volatility concept, according to Sam Rosenberg (pictured), head of equity derivatives sales and financial engineering for the Americas at Natixis.

"In addition to the low volatility investment theme exposure, the S&P 500 low volatility Target Beta index offers attractive option pricing parameters as compared to the S&P500 index in the context of certain variable annuity or structured products," said Rosenberg, adding that Natixis sales and financial engineering will develop and launch products based on the S&P 500 Low Volatility Target Beta Index, for both long only and yield seeking investors in US equity.

"We expect the S&P 500 Low Volatility Target Beta index to be used for structured products thanks to its positive relative historical performance, low volatility characteristics and significant improved implied parameters in the context of option pricing," said Rosenberg.

The S&P 500 Low Volatility Target Beta Index uses a beta-driven weighting scheme including a leverage factor that changes based on realized historical beta with the aim of bringing the beta of the index close to that of the S&P 500. The weight for the index is set proportional to the inverse of its beta at each monthly rebalancing.

Vinit Srivastava, senior director, strategy indices at S&P Dow Jones Indices said the S&P 500 Low Volatility Target Beta Index is a "dynamic index" that measures the performance of the 100 least volatile stocks within the S&P 500, while maintaining the S&P 500's level of overall market risk.

"The index benchmarks low volatility or low variance and the beta is between 0.3 and 0.8 depending on what market cycle you are in whereas the beta of the S&P 500 Low Volatility Target Beta Index is close to 1," said Srivastava. "It's a very simple and straight forward index that allows investors to get exposure to the market risk while leveraging the returns. The new index is aimed at enhancing returns while maintaining a similar level of risk as the market, and it makes sense from a return perspective as opposed to a risk perspective."

The base S&P 500 Low Volatility index has been used widely in the structured products market because it makes sense from an option pricing perspective which is actually material with these products, said Srivastava.

"When you have an underlying that reduces the volatility by 20% to 30% you have a lot more room with the kind of pay-out you can provide," said Srivastava. "The appeal of low volatility benchmarks is that in the medium and long term you either get the performance of the underlying index or a higher performance, and this kind of strategy fits with structured products."

There are over 200 structured products in the US market featuring low volatility underlyings with the S&P500 Low Volatility Index appearing as the most popular 'smart beta' index with US$558m of assets benchmarked.

The use of the S&P500 low vol benchmark is almost monopolised by HSBC which has marketed 195 products linked this index, followed by BNP Paribas and UBS with three products apiece, and Scotia Bank with one product. Other low vol indices deployed in the US market include the S&P Europe 350 Low Volatility which was used by HSBC Bank in September in its Barrier Accelerated Market Participation Securities.

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Natixis targets ‘long-only’ and ‘yield seeking’ investors in the US