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Unlocking the Advantage of Volatility-Control Innovation

  • Length 3:46

How are indices using new risk-control techniques to help enhance stability and responsiveness to evolving market conditions? Look inside the S&P 500 Advantage Index and explore how this innovative tool observes intraday volatility and uses estimations of future market movements to dynamically adjust its weights between equity and cash to navigate potential market declines and recoveries while targeting a consistent volatility level.

[TRANSCRIPT]

Unlocking the Advantage of Volatility-Control Innovation

Enhancements in risk-control techniques, coupled with the diverse ecosystem around the S&P 500, has paved the way for S&P Dow Jones Indices to develop the S&P 500 Advantage 15% VT TCA Index (USD) ER, or S&P 500 Advantage Index for short, which aims to provide dynamic exposure to the S&P 500 with an intraday rebalancing mechanism.

At the core of the S&P 500 Advantage Index is its volatility-control mechanism, which observes volatility throughout the day and uses estimations of future market movements to adjust its weights between equity and cash. This rebalancing mechanism seeks to enhance responsiveness and stability, adjusting its exposure during sell-offs to help navigate large market declines and reweighting to The 500™, to adapt to evolving market conditions and potential market recoveries.

How does the S&P 500 Advantage Index work?

The index seeks to maintain a 15% volatility level by dynamically adjusting between equity and cash throughout the trading day. The target level of 15% was selected because it is close to the historical average realized volatility of the S&P 500.

The index rebalances throughout the trading day based on the volatility observed in seven intraday windows.

When volatility falls below the 15% target, exposure to the S&P 500 can increase up to a leveraged position of 250%, which helps increase the S&P 500 Advantage Index's potential upside in stable and up-trending markets.

Conversely, when intraday volatility exceeds the 15% target, exposure to the S&P 500 can move to cash, up to 100%, which helps the index mitigate potential downside.

Estimates of future market movements, derived from hypothetical option prices, further strengthen the index rebalancing mechanism, which seeks to adjust intraday weight based on the estimated outlook of the market.

Finally, a reinforcement mechanism is applied, which helps the index's realized volatility achieve its target of 15%. Additionally, the index implements floor and cap constraints for rebalances to limit turnover.

So, how has the index performed?

Compared to more traditional risk-control indices that rebalance at the end of the day, back-tested data shows the S&P 500 Advantage Index's ability to rebalance throughout the day has helped it reduce equity exposure during market declines and increase equity weight during up-markets, which has provided a tighter pattern around its 15% volatility target. As a result, the S&P 500 Advantage Index has outperformed based on back-tested data.

To learn more about how this innovative index is helping unlock the advantage of volatility-control innovation and to get the latest performance data of the S&P 500 Advantage Index, visit us at the link below.

spglobal.com/spdji



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