The STOXX® Europe 600 Index Futures can be traced back to 1998. However, trading volumes, open interest and investor engagement in the index and its wider ecosystem have soared in 2024 as investors seek a diversified, broad-based index to hedge and trade exposures to Europe.
The STOXX® Europe 600 is one of Europe’s longest-traded and most established indexes. It references a wide range of underlying companies within the Eurozone and wider Europe, including the Nordic region, the U.K. and Switzerland.
Eurex options trading across indexes is booming this year. This is particularly true for the options on the STOXX® Europe 600, where the open interest (OI) reached 1 million contracts early in September.
August saw record trading volumes, with more than 685,000 contracts traded, almost three times the volume of August 2023. YTD, more than 7 million contracts traded in the index, compared to 5.1 million over the whole of 2023, itself a record year.
According to Philipp Schultze, Head Equity & Index Sales EMEA at Eurex, the diversification of the index has driven the activity. “The STOXX® Europe 600 represents a broader scope of European exposures across currencies,” he says.
We see growing demand from institutional investors for this broader scope in a European benchmark that includes the so-called GRANOLAS1
“The STOXX® Europe 600 includes Novo Nordisk in Danish Korona, Roche in Swiss Francs, as well as the U.K. firms in British pounds sterling. Therefore, the STOXX® Europe 600 is a broad representation of Europe and not just the Eurozone.”
“GRANOLAS” was the term coined by analysts at Goldman Sachs to describe Europe’s answer to the “Magnificent Seven”, the U.S. tech giants. However, unlike these giants, and as with the STOXX® Europe 600 Index overall, the GRANOLAS are diversified across countries, currencies, and sectors.
The STOXX® Europe 600 sits alongside the EURO STOXX 50® Index in a portfolio with the former providing broad-based exposures to pan-European stocks and the latter offering an opportunity for shorter-term profit and a more concentrated exposure to the Euro.
The EURO STOXX 50® suite of products at Eurex includes traditional futures and options, weekly options, dividend futures and total return futures. Investors benefit from deep liquidity and transparency over price formation in an index representing 60 percent of the Eurozone's total market capitalization.
Imanol Urquizu, Head of Derivatives at Santander Asset Management, says: “The STOXX® Europe 600 is not a new product for us. Most of our benchmarks that reference European equities do not benchmark against the EURO STOXX 50® Index. I think that is the case for most long-only asset managers in Europe. Just like in the U.S., where the majority wouldn’t benchmark against the DJIA with just 30 names.”
According to Urquizu, the STOXX® Europe 600 is increasingly used by long-only asset managers because of its tight correlation to other European benchmark indexes.
We use the STOXX® Europe 600 Options to hedge market risk because it is a very liquid product with a near-perfect correlation to our exposures and benchmarks.
The growing appreciation of the benefits of the STOXX® Europe 600 has fueled a virtuous circle of liquidity.
“A decade or so ago, there was very good liquidity in EURO STOXX 50® Futures and Options and but less liquidity in the STOXX® Europe 600,” says Urquizu.
“The market, therefore, predominantly used the EURO STOXX 50® to hedge. It was more liquid but had a lower correlation to the benchmarks they were using and a much higher beta.”
“To compensate, firms would try to do a mix of trading, including options on the DAX, the CAC, the FTSE and other indexes, as well as the EURO STOXX 50® to track their exposures. It was very complicated.”
Urquizu says that liquidity in the STOXX® Europe 600 is sufficient to execute large volumes and that access to liquidity in the off-book market for block trades has increased significantly over the past five years.
“Because of the tight correlation to European exposures and the growth in liquidity, more asset managers are using the STOXX® Europe 600 for their hedging.” However, according to Urquizu, there are further benefits for firms.
“When a firm buys a hedge, they are essentially buying volatility and want to pay as low a price as possible for that. This is a major benefit of the STOXX® Europe 600. The volatility of 600 names is naturally lower than that of 50, so by trading the STOXX® Europe 600, you are reducing the implied volatility and, therefore, the cost of the hedge.”
“The implied volatility on the STOXX® Europe 600 is usually around 30 percent less than on the EURO STOXX 50®, so it costs much less to hedge. With the STOXX® Europe 600, you are buying something that is correlated, liquid and cheaper; I believe all firms should be looking at this.”
The growth in liquidity in the STOXX® Europe 600 means that investors now have a broad range of tools within the STOXX ecosystem on Eurex to trade. The EURO STOXX 50® is still the most liquid European index, attracting a lot of volatility investments and hedging activities.
Specifically in periods of stress, the EURO STOXX 50® offers the deepest liquidity pool to trade and hedge European exposure. Besides the very liquid order books for EURO STOXX 50® Options, the VSTOXX complex with futures and options offers another way to get exposure to European volatility.
Building the ecosystem
Over the past five years, Eurex has been developing an ecosystem of products around the STOXX® Europe 600 Index. This includes the industry sector, dividend sector, size, as well as ESG-X index derivatives.
In 2019, it launched its first ESG-exclusion futures contract on the index. The contract has proven popular with asset managers looking for an ESG-compliant hedge on their exposures and with firms deploying alpha strategies, such as call overwriting, to capture the implied volatility on the index.
Schultze says that this is one of several additional products on the STOXX® Europe 600 that Eurex is developing.
“We are building an ecosystem around the STOXX® Europe 600,” he says. “In June 2024, we launched short-dated weekly options, and we will launch TRFs on the STOXX® Europe 600 Index on 30 September 2024.”
The TRF launch follows the success of the EURO STOXX® 50 and the FTSE 100 TRFs that replicate the payoff profile of an equity index total return swap, as well as other specialist indexes traded on Eurex.
The TRF on the STOXX® Europe 600 Index will be used to hedge some of the custom index products offered to the buy side. These custom indexes incorporate funding costs in their methodology, where a TRF can offer a better hedge than the traditional index option.
Trading hours for the STOXX® Europe 600 now extend into Asian hours, which, according to Urquizu, brings a “huge advantage” for firms.
“Not only do the extended trading hours bring new liquidity to the product, but if something happens overnight in Asia and the market crashes, firms can buy the futures in the STOXX® Europe 600 overnight.”
“If the market then stabilizes, the firms that bought the futures in the overnight market can sell the futures and take the profit.”
Future growth
Both Urquizu and Schultze expect trading in the STOXX® Europe 600 index futures and options markets to continue to grow as asset managers adjust to the “new normal” of volatile markets.
“Volatility trading was not a big thing in Europe 20 years ago, and trading was limited to banks and a small number of hedge funds. Also, volatility trading was concentrated in the EURO STOXX 50® and OTC markets,” says Urquizu.
“As understanding of hedging and implied volatility has grown, more firms have entered the market. Conservative, long-only portfolio managers started to learn more about hedging and the need to protect positions after the financial crisis. This knowledge increases liquidity in the STOXX® Europe 600, and I expect it will grow further from here.”
1GRANOLAS is an acronym coined by Goldman Sachs during the first European lockdown in 2020, representing the largest European companies by market cap at that time: GSK, Roche, ASML Holding, Nestlé, Novartis, Novo Nordisk, L'Oréal, LVMH, AstraZeneca, SAP, and Sanofi.
