Standard & Poor's has launched a new range of indices to enable investors to target and control the level of risk in an underlying S&P index.
"Volatility targeting is a common feature in structured products. However, integrating volatility control within index rules represents a new level of innovation for index providers," said Standard & Poor's Index Service vice president Steve Goldin. "Traditional investments tend to provide investors with constant exposure to an underlying index, regardless of the prevailing financial markets, whereas the S&P Risk Control indices provide a dynamic exposure to an underlying index and target a constant level of risk."
The new Risk Control methodology will initially be applied to the S&P Bric 40 Index, S&P Latin America 40 Index, S&P South East Asia 40 Index, and S&P Global Infrastructure Index, although the risk control can be applied to any existing Standard & Poor's equity index.
For each index in the new range a specific volatility target is established based on the historical volatility of the underlying index, providing a level of risk control adjusted to the current market environment. Then volatility is monitored on an ongoing basis to ensure it remains constant and if the risk level moves above the target, the cash level is increased in order to maintain the target volatility. If, however, the risk level moves below the threshold, the index will employ leverage to maintain the target volatility.