Cboe to develop S&P 500 Dispersion Index to address hedging needs

The Cboe S&P 500 Dispersion Index will help bring more transparency to the risk and opportunity set in the world’s most liquid equity benchmark.

Cboe Global Markets has announced plans to collaborate with S&P Dow Jones Indices to develop the Cboe S&P 500 Dispersion Index to help market participants better understand portfolio diversification benefits and implement dispersion trading strategies.

The new volatility-related index is designed to provide representation of implied dispersion for the S&P 500 Index. Dispersion is a measure of the spread of constituent returns over a defined period, such as a month. It measures both the opportunity set for individual security selection within a portfolio, as well as the potential diversification achieved by their combination.

The Cboe S&P 500 Dispersion Index will be the first concept developed by Cboe Labs, a newly-formed subsidiary focusing on new tradable products and services.

A standardized index to help traders hedge

John Hiatt, Vice President, Cboe Labs, said: “Cboe has been teaching market participants how to better measure, model and trade market moves through the 450-plus volatility and derivatives-based indices we’ve created over our nearly 50-year history. We revolutionized investing with the creation of the VIX® Index, the first index to measure the market’s expectation of future volatility — and today, we continue our legacy of innovation with the Cboe S&P 500 Dispersion Index.”

Tim Edwards, Global Head of Index Investment Strategy at S&P Dow Jones Indices, commented: “Dispersion is recognized as one of the fundamental metrics of market risks. Unlike related measures of volatility, there hasn’t yet been a simple, tradeable, and standardized index that enables market participants to hedge and express their views on dispersion in the U.S. equity markets. We are excited to collaborate with Cboe on the development of the Cboe S&P 500 Dispersion Index, to bring more transparency to the risk and opportunity set in the world’s most liquid equity benchmark.”

Rob Hocking, Senior Vice President and Head of Cboe Labs, added: “Driven by constant input from our customer base, Cboe Labs is a place where we research, test and iterate as rapidly as possible with a singular goal— to create value-add, disruptive, tradable products and services. Cboe Labs builds on our history of producing many ‘firsts’ for the market and the ongoing dialogue we have with industry peers and regulators on the issues impacting the markets.”