After recent spikes in market volatility, Source, a consortium of some of the world’s leading banks which offers exchange traded funds, has designed a product to track this volatility through an exchange traded fund.

The S&P 500 VIX Futures ETF is said to be the first volatility-linked ETF in Europe to track the S&P 500 VIX short-term futures total return index. It will draw interest from wealth and asset managers as it allows investors to take a view on implied volatility and to hedge against worst-case market scenarios.

The VIX index, also known as CBOE Volatility Index, is widely used to measure implied volatility and is seen as a measure of market uncertainty. While it is not easy for non-professional traders to get exposure to the VIX, the S&P 500 VIX Futures Source ETF tracks the index, an investable index that reflects the return from rolling short-term VIX futures contracts.

The performance of the index differs from the VIX; however, historically, there has been a high correlation with the VIX and high negative correlation with the S&P 500 index, Source said. 

The index reflects future expectations of the VIX and incorporate futures roll costs.

Source, which was only launched 14 months ago and is owned by BofA Merrill Lynch, Goldman Sachs, JP Morgan Stanley and Nomura, said that the events such as the Greek debt crisis, which had led to experts doubting the survival of the euro, has highlighted the need to manage exposure to implied volatility.

“The past few years have taught us that sudden, large movements in the markets can never be discounted. We are delighted to be offering this tactical tool to European investors that can be used to take an outright view on implied volatility or for hedging against worst-case market scenarios,” said Ted Hood, Source’s chief executive.

Source has worked together with Nomura, the investment bank, to originate the product. 

The new ETF is listed in London and is compliant with European Commission regulation. It has a 0.60 per cent per annum management fee.