The S&P/ASX Buy-Write Index is a benchmark index designed to track the performance of a passive ‘buy-write’ strategy on the S&P/ASX 200 Index. The buy-write strategy is an investment strategy in which an investor buys a stock, or an index, and then writes (sells) call options that correspond to the stock, or index.
Many Australian fund managers allocate investment into the sharemarket and track their performance against indices such as the S&P/ASX 200. This new index is a tool for fund managers to measure the performance and risk of an equity portfolio that adopts this strategy.
ASX is launching the index following the SIRCA1 report released in February this year, which showed that a buy-write strategy produced returns 23 percent higher2 than those produced by the S&P/ASX 200 Accumulation Index, and had a lower risk profile over the 14 year period of the study.
This research is supported by practical analysis on ASX market returns and risk, conducted by the research teams of several major broking firms in Australia. This evidence also reflects earlier results in the US equity market where similar findings have been widely accepted by industry. Consequently, The Chicago Board Options Exchange (CBOE) also calculates and disseminates a Buy-Write Index over the S&P 500 Index.
Colin Scully, ASX Chief Operating Officer said: “The Australian options market has grown rapidly in the past 5 years. In 1999 we traded on average around 39,000 option contracts per day; this year’s latest figures are nearly double that at approximately 77,000 contracts per day. For calendar 2003, the notional value of options trade was approximately $215 billion, demonstrating the significance of options to equity market participants. This growth has been partly a result of the increasing sophistication amongst Australian investors, who use options conservatively to insure the value of their share portfolios, and to enhance their returns. What this index will do is provide the fund management industry with a simple and transparent way to benchmark whether they are producing optimum returns at the lowest risk possible when adopting this strategy.”
The S&P/ASX Buy-Write Index has also received strong support from the market.
Tim Eisenhauer, Head of Index Services, Standard and Poor's said: "The S&P/ASX 200 is the institutional benchmark index for the funds management industry in Australia, who use its performance to assess the performance of their own funds. We believe there is demand from this industry for new ways to measure their performance. The Buy-Write Index has proven to be popular in other markets, and we expect the Australian market will see it as a natural progression for this increasingly sophisticated market."
1 SIRCA is the Securities Industry Research Center of Australia that incorporates 25 leading Australian universities.
2The return on the Buy Write portfolio averaged 2.96% per quarter (approx 11.83% pa), 23% greater than the return of the Accumulation index portfolio of 2.40% per quarter (approx 9.59% pa)
