Cboe Global Markets

Cboe® MSCI® PXEF Index Generated Monthly Yields, Higher Returns, and Lower Volatility

Matt Moran
▬
March 17, 2024

Highlight:

  • Compared to the MSCI Emerging Markets Index, the Cboe MSCI Emerging Markets PutWrite Index (PXEF) had higher returns, lower standard deviation and higher risk-adjusted returns.

Cboe offers dozens of strategy benchmark indices that are designed to track the performance of hypothetical strategies that take index options positions, such as the Cboe MSCI EAFE PutWrite Index (PXEA) and the Cboe MSCI Emerging Markets PutWrite Index (PXEF):

  • The Cboe MSCI EAFE PutWrite Index (PXEA Index) is designed to track the performance of a hypothetical passive investment strategy that collects option premiums from writing an at-the-money MXEASM put option on a monthly basis and holds a rolling money market account invested in one-month T-bills to cover the liability from the short MXEA put option position, generally on the third Friday each month.
  • The Cboe MSCI Emerging Markets PutWrite Index (PXEF Index) is designed to track the performance of a hypothetical passive investment strategy that collects option premiums from writing an at-the-money MXEFSM Put option on a monthly basis and holds a rolling money market account invested in one-month T-bills to cover the liability from the short MXEF Put option position, generally on the third Friday each month.

The PXEA and PXEF indices track hypothetical positions that engage in the cash-secured putwrite strategy. Exhibit 11 of the Wilshire white paper shows the monthly premiums generated for Cboe MSCI option-writing indices. 


Less Severe Peak-to-Trough Drawdowns for Two Option-Writing Indices

Risk-averse strategies often try to avoid extreme peak-to-trough drawdowns. Option-selling strategies that collect options premium may have the potential to serve as a cushion in times of bear markets.

As shown in the two charts below, since April 2006 the worst drawdowns for the Cboe PXEF Index (down 37%) and the Cboe PXEA Index (down 38.4%) were less severe than for the MSCI Emerging Markets Index (Net USD) (down 61.6%) and six other indices.  

Drawdowns Since 2006 (Apr. 2006 – Feb. 2024)

Month-end data for total return (pre-tax) indices are used. Sources: Zephyr and Cboe Global Indices.


Heat Map and Mitigation of Losses in 2008, 2018, and 2022

As shown in the heat map below, in the down years of 2008, 2018, and 2022, the Cboe MSCI PXEF Index outperformed the MSCI Emerging Markets Index (USD) each year. The options premium received by cash-secured put writing strategies has the potential to help mitigate stock index losses in some down years. 


Smoother Returns and Lower Volatility for PXEA and PXEF Indices

Between 2006 and 2024, the PXEA and PXEF indices had lower standard deviations than seven other indices, as shown in the chart below. 


Higher Returns and Risk-Adjusted Returns for PXEF Index

Between April 2006 and February 2024, when compared to the MSCI Emerging Markets Index (Net USD TR), the Cboe MSCI PXEF Index had higher returns (4.2% vs. 3.9%), and higher risk-adjusted returns, with a higher Sharpe Ratio (0.21 vs. 0.12), and higher Sortino Ratio (MAR = cash-eq.) (0.27 vs. 0.18).  

In the same time period, the Cboe PXEF Index had the highest returns and had lower volatility than the two stock indices and the 20-Year U.S. Treasury Bond index. 

More Information

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