Cboe Global Markets

New Cboe® MSCI® Index Tools to Track and Manage Global Equity Exposure

Matt Moran
▬
March 17, 2024

Highlights:

  • Five New Cboe MSCI Global Products: Two new volatility indices (VXMVEA and VXMXEF) and new Cboe options on three MSCI indices: MSCI ACWI Index, MSCI World Index and MSCI USA Index.
  • Of the five MSCI stock indices, the MSCI USA Index had the largest weighting to the Information Technology sector (30.13%), the highest annualized return (8.1%), and the highest Sharpe Ratio (0.42).
  • The MSCI EAFE Index and the MSCI Emerging Markets Index often had an implied volatility risk premium.
  • The VXMXEF Index hit a daily closing high of 77.94 on March 18, 2020, as concerns about the Covid-19 Pandemic took hold. 
  • Volatility skew charts show that implied volatility is often higher for out-of-the-money puts on the MSCI EAFE Index (MXEA) and MSCI Emerging Markets Index (MXEF).

The launch of two new Cboe-MSCI indices and three new index options products fills the need for more tools to track and manage global equity exposure.

Two New Volatility Indices:

Three New Index Options: Cboe is expanding its existing MSCI Index options suite by introducing three new products based on MSCI global indices:

  • Cboe MSCI World Index Options (MXWLDSM)
  • Cboe MSCI ACWI Index Options (MXACWSM)
  • Cboe MSCI USA Index Options (MXUSASM)

The new index options join the current suite of Cboe MSCI tradable products, which includes the Cboe MSCI EAFE Index Options (MXEASM) and Cboe MSCI Emerging Markets Index Options (MXEFSM).

Comparing Key MSCI Stock Indices

The table below compares five key MSCI stock indices.

  • Largest Index. The MSCI ACWI Index (MXACW) is the largest of the five indices in terms of number of constituent stocks (2,919) and a total market capitalization of the index of $70.5 trillion.
  • Weightings and Returns. The MSCI USA Index had the largest weighting to the Information Technology sector (30.13%), the highest annualized return (8.1%), and the highest Sharpe Ratio (0.42).
  • Monthly Volatility. The annualized standard deviations of monthly returns for the indices ranged from a low of 15.5% for the MSCI USA Index, to a high of 21.1% for the MSCI Emerging Markets Index (USD), an important factor for risk management and index options pricing.

 

Different Sector Weights and Returns for MSCI Stock Indices

Differences in sector weighting among the MSCI stock indices have led to differences in performance among the five indices. For example, at the end of February 2024 the weighting of the Information Technology sector was higher in the MSCI USA Index (30.13%) than in the other four indices, with MSCI World Index having the second highest weighting (24.11%), followed by MSCI ACWI Index (23.96%), MSCI Emerging Markets Index (22.76%), and MSCI EAFE Index (9.42%).

In 2023 the average return of the so-called “Magnificent Seven” U.S. meg-cap stocks (AAPL, GOOGL, MSFT, AMZN, META, TSLA, and NVDA) was 111%. As a tech-heavy index, the MSCI USA Index returned 27.1% in 2023 and outgained the other four MSCI indices in five of the past six calendar years. See the Annual Returns heat map below for more data.


MSCI Stock Indices Volatility

  • Expected Volatility | Volatility indices such as the VIX® Index, VXMEXA and VXMXEF are designed to provide the index options market’s expectation of future 30-day volatility.
  • Historical Volatility | Historical volatility is based on past historical prices and represents the degree of dispersion in the past returns of an index.

The charts below depict the expected volatility of The VXMXEF and VXMXEA and 30-day volatility for five MSCI indices. Highlights include:

  • Higher Volatility. The MSCI Emerging Markets Index (MXEF) [SA5] had higher average daily expected volatility than the MSCI EAFE Index. The MSCI USA Index had the highest average daily historical volatility in the second chart below.
  • Peaks in 2020. In the past five years the peak volatility for all the MSCI stock indices occurred in March and April 2020, as worldwide markets experienced uncertainty during the start of the Covid-19 Pandemic. The VXMXEF Index hit a daily closing high of 77.94 on March 18, 2020.
  • Volatility Risk Premium. The average daily values for the two volatility indices –VXMXEF (22.0) and VXMXEA (18.3) were significantly higher than the historical volatilities for the MXEF Index (15.9) and the MXEA Index (14.5). In regimes when implied or expected volatility is higher than the subsequent realized volatility, there is an implied volatility risk premium (IVRP) which may be favorable to options sellers.
  • A whitepaper by Wilshire also notes that “Strong risk-adjusted returns for the [Cboe MSCI] option-selling indexes were fueled by index options that were often richly priced, and expected volatility landing higher than subsequent realized volatility.”


Big Moves, Convexity and Negative Correlations

The VXMXEA Index had gains of more than 30% on seven days between August 2018 and March 2024. On all seven dates MXEA, the corresponding stock index, experienced declines ranging from 0.9% down to 10.4% down.

On February 24, 2020, when uncertainties and fears about Covid-19 were increasing the MSCI EAFE Index (MXEA) fell 2.4%, and the MSCI ACWI Index (MXACW) fell 3%. At the same time, the VXMXEA Index rose 45.9% and VXMXEF Index rose 29.2%.

When a stock index experiences downward moves, there is a possibility that expected volatility and the corresponding volatility index might experience a sharp rise. Some volatility indices have experienced some large moves, convexity in returns and negative correlations versus the returns of the underlying stock indices. 


Volatility Skew for MXEA and MXEF Options

The two volatility skew charts for MXEA and MXEF options show that the estimated implied volatilities were often much higher for the out-of-the-money (OTM) puts when compared to many of the OTM call options. OTM index option puts are bought for portfolio protection. Some OTM index option puts have been richly priced with higher implied volatilities in much of the time since October 1987.

 Source: pro.livevol.com


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