S&P 500 Introduces Inverse Index, More to Follow

With all the inverse index funds popping up on the scene these past few months, it's not surprising that an actual index provider might want to get in on the action. Tuesday Standard & Poor's announced the launch of the S&P 500 Inverse Index.

The index tracks the returns of a short position in the S&P 500 Index, or rather, the inverse of the S&P 500's total return. Although borrowing costs are not included reflected in the index, it does incorporate the effect of interest earned on the investment and on the profits from the short selling of the components of the S&P 500.

Srikant Dash, S&P's head of global research and design, says the demand for the S&P 500 Inverse Index came from two directions. The prevalence of inverse index products—such as exchange-traded funds offered by firms like ProShares and Rydex—in the U.S. was one. Despite the growing popularity of inverse index products, until now there has not been a benchmark against which a fund or structured product promising the inverse of the S&P 500's performance could be measured.

"It's not as simple as putting a negative sign in front of the benchmark," says Dash. The new index will give U.S. investors and product providers a standardized benchmark for measuring the performance of products intended to reflect the inverse of the S&P 500's total return.

The other source of the demand came from overseas, and is really the result of regulatory issues. In Europe and parts of Asia, to create a fund promising the inverse of an index requires an actual index tracking that inverse performance (although structured products do not face similar restrictions), Dash says. So if those parts of the world have yet to see a surge of inverse ETF launches similar to the one that has been going on here, it could be more due to a lack of indexes and legal restrictions than lack of investor interest.

Dash says more inverse indexes are on the way, as well as leveraged indexes. The S&P/GSCI and S&P BRIC 40 Index will be the next ones to get their own inverse indexes, he adds. Both are popular indexes and represent areas of the markets that have been receiving a lot of attention.

Inverse and leveraged index products such as those offered by ProShares and Rydex have been steadily growing. With S&P stepping into the area as well as an index provider, the trend has gotten a further boost that could help its growth not just domestically, but overseas as well. And it seems likely if S&P continues to expand this new family of indexes, other index providers will also start rolling out doppelgangers for their existing indexes.

Written by Heather Bell