Merrill Lynch today introduced the U.S. Forward Equity Variance Rolling index, which will track the performance of a long S&P 500 volatility strategy. Given the high negative correlation to equities, considering volatility as an asset class and integrating it into a portfolio could help to significantly reduce overall portfolio risk, said Heiko Ebens, head of equity derivatives research, in a news release. Moreover, volatility can provide equity investors with protection when they most need it, during periods when markets are declining sharply.
The Forward Equity Variance Rolling concept was first introduced by Merrill Lynch in March 2007 and was applied to the Dow Jones Euro STOXX 50 Index to access the volatility of equity markets within the eurozone. Since then, the weekly return correlation of the Euro FEVR strategy to the market has been -72%, highlighting the diversification benefits of an investment in volatility during periods of uncertainty for equity, said Alex Ypsilanti, head of European equity derivatives research at Merrill Lynch, in the release.