NEW YORK — Standard & Poor’s this month introduced the S&P 500 Inverse index, which provides the inverse performance of the widely used stock benchmark.
For U.S. investors, the inverse index will serve as a benchmark to measure short positions in equities, said David R. Guarino, communications manager of the New York-based company. “Up until now, such a benchmark didn’t exist.”
For investors in Europe and Asia, where many jurisdictions prevent index shorting not based on an existing short index, the inverse index could serve as a basis to create investment products, Mr. Guarino said. U.S. investors don’t face such a restriction, he added.
The S&P 500 Inverse index’s return, which will be priced daily, will have an inverse relationship with the total return of the S&P 500, which includes both dividends and price movements, Mr. Guarino. The inverse index won’t include dividends; when investors short a stock they have to pay dividends for the borrowed stock. The inverse index will make adjustments, including on interest earned on proceeds from selling short S&P 500 securities, he added.
David Reilly, director-portfolio strategy at Rydex Investments, Rockville, Md., which already offers inverse index mutual funds and exchange-traded funds based on the S&P 500 and other popular equity benchmarks, said of the S&P move, “I think it validates the space we’ve been in.” He said Rydex could use the new index as a benchmark for its own S&P 500 Inverse index funds or as a design to refine its own such funds. “It is something we have to look at very closely.”
Rydex, which began offering inverse index funds in 1994, now has 11 inverse index mutual funds, including an inverse S&P 500 index fund. The 11 funds’ combined assets total $1.7 billion. In addition, Rydex in November introduced three exchange-traded funds: an inverse S&P 500 fund, an inverse S&P 400 midcap fund, and an inverse Russell 2000 fund covering small-cap stocks. The combined assets in the three ETFs total $31 million.
Only a small amount of the assets now in the Rydex inverse index funds comes from institutional clients, said Dawn Kahler, Rydex vice president of corporate communications. Executives at the investment company “definitely see an opportunity” to market to defined contribution funds, although plans are still being developed, said Ms. Kahler.
“One of the reasons you are seeing more activity” in inverse funds is because “tools for retail investors (including participants of defined contribution plans) and financial advisers had at their disposal for dealing with equity market downturns have been suboptimal,” Mr. Reilly said. These less-efficient tools include raising cash positions or changing strategic asset allocations, both of which can disrupt the structure of a carefully constructed portfolio, he added.
Inverse index funds “offer a cost effective way to hedge market exposure,” Mr. Reilly said.
