Bitcoin and lower volatility may seem like opposites, but could it be time to rethink that perspective? S&P DJI’s Michael Mell and Cyber Hornet ETFs’ Mike Willis look inside a blended custom index with 75% weighted to the S&P 500 and 25% weighted to Bitcoin futures as a unique approach to risk management.
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How does custom indexing work at S&P DJI?
Michael Mell:
At S&P Dow Jones Indices, we design indices in partnership with clients. So this happens in really three key ways. One is where they take an existing S&P DJI index and we'll provide some bespoke tailorizations, where we remain the index sponsor and the benchmark administrator.
The other two services that we offer are when we calculate a client's index, where we function as the calculation agent. So what a lot of people might not know is you can actually work with S&P Dow Jones Indices to calculate your own index, and you can even use our family of indices as the starting point to create your own tailored solution, such as using the S&P 500 as the starting universe or an index component within your own proprietary strategy.
Why are you combining cryptocurrencies with the S&P 500 in your custom indices?
Mike Willis:
It's all about volatility, and if you look at the new digital asset class, it's a high-risk, high-return potential category. That means lots of volatility. So what we've done is we've taken the S&P 500, mixed it in with the digital asset to buffer that volatility, and that way we believe it can be made available to a larger investor base.
How did you arrive at the 75/25 weighting scheme for the custom S&P 500 and S&P Bitcoin Futures 75/25 Blend Index?
Mike Willis:
What we did is we back-modeled the different percentages, and our goal was really to find that sweet spot where we felt investors could handle a threshold of volatility, downside volatility, that they couldn't handle in a normal Bitcoin portfolio. For example, Bitcoin has had several years where it's been down over 50-60% in a year. We don't believe most investors can handle that kind of volatility.
So what we looked at was, our threshold was how can we keep their volatility under down 30%. And that 75/25 rebalanced monthly really was a good sweet spot because it still gave them the upside potential of Bitcoin and whatever the digital asset is that we're blending in, while at the same time giving them that comfort and simplicity that the S&P 500 brand has brought over the last 30 years.
What trends are you seeing in custom indexing today?
Michael Mell:
So it's really quite a number of different trends, but I think one of the key things that we can see is a desire to adjust volatility. In other words, there's certainly a general market demand for a certain amount of stability and consistency, so we see a lot of that along with various thematic plays, and some of it can be a little bit regional. Like in Europe, we'll find much more exotic strategies that blend a variety of different asset classes, but certainly in the United States, measuring out volatility is something that we find quite common to clients.
Why is it important that the base of Cyber Hornet’s custom strategy include the S&P 500?
Mike Willis:
Yes, it's huge, especially from a financial advisor standpoint. A lot of financial advisors are not comfortable enough to recommend Bitcoin and other digital assets to their clients. That comfort level isn't there yet.
So by having the S&P 500 as the base of the portfolio, the advisors now have a bridge to expose their, in a smart way, in our opinion, to the high-risk, high-return performance of digital assets. So when you look at financial advisors, we believe, for the first time, they can safely and simply move their clients into this space without risking the house.
Closing:
For more about custom indexing, visit the link below: spglobal.com/spdji/en/custom-indices/solutions
