Bank of America Merrill Lynch (BAML) has partnered with ETF Securities (ETFX), a specialist issuer of exchange-traded products, to launch its IVSTOXX ETF, the first exchange traded fund (ETF) linked to European equity volatility, on Deutsche Börse.
The release on the German market follows the product's debut on the London Stock Exchange in March 2011.
IVSTOXX ETF is linked to the EURO STOXX 50 Investable Volatility Index, an investable index that reflects the implied volatility of the EURO STOXX 50. The IVSTOXX is calculated independently by STOXX Limited, an index specialist. BAML has stated the index is linked to medium-term forward volatility, which it says has historically provided efficient access to volatility as an asset class.
BAML also notes that equity market volatility has demonstrated a degree of negative correlation with equity returns and an allocation to volatility as an asset class may therefore provide investors with diversification benefits. The IVSTOXX ETF is designed to allow investors to access this diversification through a single, listed instrument.
Whereas previous European volatility indices were not directly tradable, the IVSTOXX is replicable through a portfolio of listed EURO STOXX 50 options, thus benefiting from the liquidity available in the listed options market.
“The EURO STOXX 50 Investable Volatility Index is a sophisticated tool to measure the market's sentiment about economic uncertainty, while at the same time offering the benefits of a transparent and rules-based methodology to market participants,” said Harmut Graf, CEO of STOXX Limited.