How is the continued evolution of the S&P 500 ecosystem helping market participants around the globe express views and manage risk? S&P DJI’s Tim Edwards and Cboe Global Markets’ Mandy Xu explore how the iconic index reflects global trends and how network effects are helping bring increased transparency and price efficiency to markets around the world.
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Michael Grifferty:
Good morning. My name is Michael Grifferty, and I'm here with Tim Edwards of S&P Dow Jones Indices and Mandy Xu at Cboe Global Markets. Today we're going to delve into the S&P 500® ecosystem and the significance of index investing for global markets. Good morning, Tim. How does index liquidity matter, and how has the S&P 500 trading ecosystem evolved in recent years?
Tim Edwards:
For so many different kinds of market participants, from short-term traders to long-term buy-and-hold passive investors, the value of liquidity, volumes and a healthy trading ecosystem, is threefold. First of all, it improves price discovery. Second, it improves transparency. And third, it fosters confidence. So it's really important.
Last year, in 2024, across all the different listed products tied to S&P Dow Jones Indices, we measured USD 296 trillion of trading volumes globally. A significant component, not all of it, but a significant component is products tied to the S&P 500. And that's been growing, so the volumes tied to the S&P 500 grew by USD 50 trillion between 2023 and 2024.
And it's not just the index itself. There are also related components of actually, a network of related products. So these include, for example, sectors, factors, dividends, the volatility of the S&P 500, and spans across different product types, ETFs, futures, options and so on. And it spans around the world through cross-listings and other ways that people can trade.
You can essentially trade the S&P 500 or linked products almost 24 hours a day in markets from New Zealand to Peru. All of this together creates network effects, improving that transparency, improving the price discovery process and allowing market participants around the world to express views, to manage risk and what that all does together is back to that third point. It fosters trust and it fosters confidence in the overall financial system.
Michael Grifferty:
How is the S&P 500 relevant for investors in the Middle East?
Tim Edwards:
Look, it's a good question. The S&P 500 itself is a U.S. equity benchmark, so it's American stocks. However, those companies themselves have a global relevance that includes many of the largest companies in the world, and companies like, for example, Microsoft, that although they are U.S. headquartered, have a global revenue base and represent and capture global economic trends. So that's one part of the puzzle. It's yes, these are American companies, but in many senses, these are global companies.
Another part of the puzzle is to do with actually what is available here and what is importantly not available so much here in the Middle East. The capital markets in the Middle East are vibrant and they are growing. But as of today, they are still dominated, in terms of the large caps, dominated by the traditional sectors like Financials, Materials, Energy. And it's difficult locally to get exposure to those global trends, be they in the Technology sector or Communication Services sector or in the Health Care sector.
So a liquid, easy way to access these global trends may be offered by something like the S&P 500. Final thing to mention, and of course, with the compliance proviso that past performance is no guarantee of future performance, but for more than a century, the U.S. equity markets have offered exemplary performance. Some call it U.S. exceptionalism. And of course, there's no guarantee that'll continue. But at least historically, the U.S. capital markets and the S&P 500 in particular have represented an opportunity to participate in growth globally.
Michael Grifferty:
Mandy, what are some themes and trends that you have observed in the U.S. derivatives market this year?
Mandy Xu:
Sure. I would say the three main trends that we've seen, the first is the continuing growth and popularity of short-dated options trading. The second is the broadening of participation in the options market in terms of the investor types that we're seeing. And third has been the growth of the options-based ETFs, which has been a really big driver in the market.
So on the first point the continuing popularity of short-dated options trading, this is really dominated by the so-called zero-date-to-expiry or zero-DTE options. To give you a sense of kind of how big they've gotten, five years ago, zero-DTE options made up about 20% of overall SPX option volume. Today, they make up over 60% of the total volumes. That means on a daily basis, one and a half trillion notional of options that are trading are trading an option that expire the same day.
On the second point of the broadening out of participation, we're seeing it in both in terms of investor types. Historically, index options have been primarily used, I would say by institutional investors. In recent years, we're seeing more and more individual traders coming into this market. And second, we're seeing more global participation. So volume in our global trading hours has grown by more than eight times in the past five years.
And the last thing I talked about, which is the rise of the options-based ETFs, when you look at the total AUM in these products, they went from about USD 30 billion five years ago to now around USD 300 billion. So in total, they're now actually bigger than the entire U.S. structured product market. So that has indeed been a very notable trend that we've seen.
Michael Grifferty:
What's driving the growth in options-based ETFs, and where are you seeing the greatest adoption of zero-days-to-expiration options?
Mandy Xu:
Sure. So, I would say ease of access has really been key to driving the growth in options-based ETFs. When we talk to a lot of wealth advisors, RIAs, one of the key themes we keep hearing or feedback that we've gotten, is that historically, implementing an options-based strategy on their client's portfolio has been really difficult in terms of getting the end client to understand what is an option, right? And operationally, it's difficult in terms of the trading logistic, the risk management of these strategies. And now with these ETFs, all that complexity is reduced to a simple ticker. So options-based strategies now become very easy to access. And in terms of what we're seeing the demand, it's coming in two types.
So one is in kind of ETFs, what we call derivative income ETFs, ETFs that are using options primarily to give the end investor income, so selling options. And then the second type is defined outcome ETFs, and these are ETFs that are giving the end investor protection, and so using options, for hedging purposes. And those are kind of the two areas we've seen the greatest growth.
On the zero-DTE front, I would say we've seen growth in both institutional as well as in the individual investor in terms of trading volumes. And in terms of kind of use cases, we've seen investors use them for hedging purposes, we've seen investors use them for income, we've seen them for playing intraday momentum or reversal. So a diversity of use cases and a diversity of market participants in the zero-DTE market.
Michael Grifferty:
Tim, volatility has been a central theme this year. Tell us, what is the VIX and how is it used by investors?
Tim Edwards:
What is the VIX, indeed? So the VIX, or to give it its full name, the CBOE Volatility Index is an index. And like all indices, it relies on a methodology. What this essentially does, to simplify it somewhat, is it uses the prices of hundreds of different S&P 500 index options with a time horizon of on average 30 days, and it encodes a weighted average price of those options to give a market reading, an expectation for the volatility of the S&P 500 index over the next 30 days.
So that's what it is. The more important question is, what's it for? So there are three main ways that the VIX is used by the market. The first is as an indicator, as a measure of sentiment. What sets the prices of these options is two things mainly. One is the supply and demand for insurance, or essentially for the payoffs that options give you. So, it's a measure of the cost of insurance, and it's also a measure of sentiment.
When the VIX is low, it indicates cheaper insurance, it indicates a confident market. When the VIX is high, that's telling you there's a lot of uncertainty about the short-term future. The second way, that it is used or can be used, and I have to be careful what I say here, but what it does essentially, what market participants do when they're pricing options, is they will encode all the information they have about what we already know we don't know.
So, for example, if there's an election coming up, if there's an earnings season coming up, all the information we have about the next 30 days, that's part of the information that's going into how market makers and others will price options. And so VIX, it has a predictive aspect.
It is far from perfect, it doesn't know what we don't know that we don't know, so it doesn't really predict the future, but it is forward-looking and it does give you a measure and it sort of aggregates all the information about what we know is coming up and the uncertainties that we're aware of.
The final thing, since there are futures, options and other tradable products tied to the VIX Index, it also enables market participants to express a view on future volatility, to manage volatility risk or indeed to build strategies that use things tied to the VIX to potentially generate alpha or to enable or power systematic hedging strategies.
So it's a measure of sentiment, it has some degree of predictive power and it's also the basis for tools that market participants can use to express views, manage risk, or indeed to do other things.
Michael Grifferty:
Mandy, turning back to the themes that you discussed before, how have they been affecting the level of the VIX?
Mandy Xu:
Yeah, that's a great question and one we get a lot. Oftentimes when we kind of point out the rise in the options-based ETFs in particular and how many investors are using these ETFs to access option selling strategies, one question we get is, are these strategies and the growth in these strategies kind of suppressing the level of the VIX? And I understand kinda where that comes from. They look at the growth in the AUM and obviously in it becoming a much bigger part of the market, but I think what investors oftentimes forget is just the overall depth and liquidity of the S&P options ecosystem.
Over the past five years, SPX options volume have grown more than 4x. We're talking about almost three trillion notional, trading on a daily basis. So while some segments of the market and the market participants have grown in terms of activity, I would say, the entire market has also grown and the liquidity and the depth of the S&P options market is such that no one participant has really an outsized influence on the level of the VIX. So yeah, I think that's really important to keep in mind.
Michael Grifferty:
Mandy, Tim, thank you very much for your insights.
