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CAPITAL MARKETS

Indices: Merrill Lynch debuts US volatility index

Helko Ebens, Merrill Lynch

"Volatility can provide equity investors with protection when they most need it"
Helko Ebens, Merrill Lynch

Merrill Lynch has launched an investable index that the bank’s researchers say gives investors cleaner and more efficient access to US equity market volatility than products linked to the present benchmark, the Chicago Board Option Exchange’s Vix (Volatility Index). The Merrill Lynch US Forward Equity Variance Rolling (FEVR) index is designed to measure the performance of a long S&P 500 volatility strategy and follows the launch last year of a similar index in Europe, based on the volatility of the Dow Jones Euro Stoxx 50.

Investors looking to trade US volatility can do so by trading futures linked to the Vix – although options on the Vix also became available in 2006. However, New York-based Heiko Ebens, head of equity derivatives research at Merrill Lynch, says the futures-based product does not give a pure exposure to volatility. "You cannot invest directly in the Vix. You can buy a future on the Vix but typically the Vix futures contract will be priced way below the Vix in anticipation that the Vix will fall by contract expiration," he says.

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