The owner of the Toronto Stock Exchange is ready to launch Canada’s first sophisticated measure of stock volatility early next week, giving investors another tool to assess market risk.
Using the same model as the popular VIX index south of the border, TMX Group will unveil the S&P/TSX 60 VIX on Monday to measure the expected volatility of share prices in the country’s 60 largest companies based on market value.
The VIX became an important indicator to watch when the global financial crisis first exploded in the fall of 2008. Because the VIX looks 30 days ahead, investors started using it as a gauge of what to expect in the month to come. Typically, when volatility dies down, stock markets rise because the trading environment is less frantic.
At one point it made sense to apply the VIX’s movements to the Canadian market because exchanges on both sides of the border moved in tandem. Over time, however, their performance has diverged, largely because demand for commodities props up the Canadian market.
“Canadian investors want to have exposure to Canadian volatility,” said Alain Miquelon, president and chief executive officer of the Montreal Exchange, which is also owned by TMX Group. “Using the U.S. product is not a perfect hedge.”
To get by, some Canadian traders currently look at what is known as the Implied Volatility Index, but Mr. Miquelon described it as a less sophisticated measure than the new VIX index.
The Canadian VIX will use a similar methodology to the popular U.S. product, keying off the volatility implied by options prices, he said. The only major difference between the two will be the options they use in their calculations – the VIX is based on stock options traded on the Chicago Board Options Exchange, while the Canadian version will be based on options traded on the Montreal Exchange that track the TSX.
Portfolio manager Adrian Mastracci at KCM Wealth Management Inc. said TMX is right to recognize the importance of volatility to investors’ decisions. “We’re getting more magnified swings every now and then and it makes everybody stand up and take notice.” The most recent example came as the European debt crisis took hold this spring and the VIX surged as investors grew anxious. A stock market slump soon followed.
Unlike the U.S. VIX, which tracks the entire S&P 500, the Canadian version will only track the 60 largest companies on S&P/TSX. Mr. Miquelon said the smaller number is simply a function of the size of Canada’s market. “Portfolio managers are benchmarked on the 60,” he said.