Goldman Sachs will on Thursday launch a product allowing investors to take positions in a new index that tracks the level of price swings in German equities. The product, which will be aimed at wealthy retail investors in Germany, is more sophisticated than anything hitherto seen in Europe.
It comes as many analysts forecast rising volatility in European and US equity markets later this year after a period in which price levels have been unusually calm. This, in turn, is expected to spur broader investor interest in volatility-linked products – and may even accelerate the creation of a new derivatives market linked to these indices in Europe.
Historically, volatility in equity markets has tended to rise in the US about three years after the start of an economic upturn, with Europe following suit a few months later.
Until now, European volatility indexes, such as the VDAX in Germany, have lagged behind their main American counterpart, the Chicago Board Options Exchange volatility index, or VIX. Consequently, while investment banks have already produced some products that let investors gain crude exposure to European equity price swings, these have not been very popular, partly because they have been insensitive to short-term market movements, and thus less useful than comparable US products.
Yesterday however, Deutsche Börse, the main German exchange, said it would start a new group of European volatility indices with Stoxx, the German indices provider, and SWX, the Swiss exchange. This will include a new, more sophisticated version of the German index, the VDAX-NEW, as well as a pan-European index, the VSTOXX.
These new indices should provide a much more sensitive and accurate indication of price swings. However, they will also potentially permit Europe to follow a step that is already afoot in the US – the creation of derivatives based on volatility indices.
Goldman Sachs, which also helped produce the methodology underpinning the VDAX-NEW, is not launching any such products immediately. Instead, the product it is unveiling today, known as Open End Participation Certificates, allows German investors to purchase simple exposure to the volatility index.
However, Goldman Sachs’ move is likely to be copied by other investment banks, particularly if the markets turn more volatile later this year.
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