INTERVIEW - Strong demand for volatility indexes - S&P's Blitzer

AMSTERDAM Fri May 6, 2011 9:28pm IST

A red London bus passes the Stock Exchange  in London February 9, 2011. REUTERS/Luke MacGregor/Files

A red London bus passes the Stock Exchange in London February 9, 2011.

Credit: Reuters/Luke MacGregor/Files

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AMSTERDAM (Reuters) - Strong market swings have led to rising investor demand for index products linked to volatility, according to the chairman of the index committee at McGraw-Hill's Standard & Poor's.

"The strongest need for new indexes can be observed with regard to volatility-related (products)," David Blitzer told Reuters in an interview at Inside ETFs Europe, the continent's biggest ETF conference, adding that demand in the U.S. market was bigger than in Europe.

Indexes measuring volatility have gained in prominence in recent years as investors explore options for taking advantage of big market swings.

The Euro STOXX volatility index and the VDAX-NEW volatility index, which measure the implied volatility of put and call options on stocks traded on the Euro STOXX 50 and Germany's DAX indexes, respectively, are two examples.

S&P is one of the big global index providers, alongside the FTSE Group, which is jointly owned by the London Stock Exchange and The Financial Times; Dow Jones Indexes, owned by CME Group Inc and News Corporation; and MSCI Inc.

Blitzer also said that providers of exchange-traded funds (ETFs) were slowly growing in importance regarding the design of indexes, but could not identify a major push by ETF players to approach index providers for new products.

"Sometimes we will seek out ETF providers, sometimes the ETF providers come to us."

Exchange-traded funds are index funds listed on an exchange that can be traded just like regular stocks. They try to replicate the performance of indexes and offer lower costs than actively managed funds. Most ETFs are backed by equities.

S&P's index committee receives a small number of proposals for new indexes each year, including from the ETF industry, that are ultimately rejected, Blitzer said, adding that S&P did not want to risk its reputation by building exotic and unstable indexes that did not make sense.

"If (an index) blows up, do you want to see it as news on the front page of the Wall Street Journal? Do you want to see it on Reuters screens? Not really."

(Editing by Will Waterman)

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