Combining CBOE and MSCI Gives Investors the World

In a few weeks CBOE will begin listing options on two of the widely followed MSCI Indexes. This addition of cash settled index options on the MSCI EAFE and MSCI Emerging Market Indexes will result in investors being able to gain exposure to just about every investible market in the world by trading at CBOE. After such a bold statement, an explanation is definitely in order.

Before discussing the world I’ll address the United States. On a notional basis the S&P 500 (SPX) Index option market is the most actively traded option market in the United States. The fastest growing index option market in the US for 2014 was the Russell 2000 (RUT) Index option market. Both these index option markets trade at CBOE with SPX basically representing large cap stock performance and RUT considered a measure of small cap stock performance. Another approach that investors take when comparing these two indexes is that SPX stocks are US based multinational companies and RUT represents performance of stocks that are doing a large portion of their business within the United States. When you combine the S&P 500 and Russell 2000 the result is exposure to two domestic market sectors – large cap and small cap which defines a large number of money managers.

The EAFE in MSCI EAFE stands for Europe, Australasia, and Far East. An easier way to remember what you get with EAFE is that the index measures the performance of developed markets excluding those in North America. There are currently 21 countries and 909 companies included in the MSCI EAFE Index. The market capitalization of these 909 companies represents about 85% of the free float capitalization of the markets covered by the index.

Finally, the MSCI Emerging Markets Index is exactly what you would think. An index that measures the combined performance of the performance of emerging market companies. Needless to say, this index includes Brazil, China, and India along with 20 other countries. There are 836 companies in the MSCI Emerging Markets index which, like the EAFE, results in about 85% of the market capitalization of these 23 countries being represented by the index performance.

I know that saying the combination of MSCI and CBOE will give you the world may be a bit over the top, but for macro managers the addition of index options on these two MSCI Indexes is going to make asset allocation much easier. Consider that with SPX and RUT options a domestic US manager can easily shift exposure between large and small cap stocks. When MSCI options begin trading portfolio managers with a global focus will be able to easily increase or decrease exposure between developed and emerging markets through options listed at CBOE.

As the launch of MSCI approaches I will continue to learn more and share more about the MSCI Indexes with my plan being a blog every Wednesday. In the mean time you can always visit to learn more about all the indexes calculated and disseminated by our friends at MSCI.

Finally, in this space last week I commented on how it appears options on both the MSCI EAFE and MSCI Emerging Market Indexes may trade based on volatility indexes currently calculated at CBOE –