At 9:45 am Eastern Time on Sept. 27, 2023, a new index began publishing under the ticker DSPXSM, with an initial live value of 26.81. This index, the Cboe S&P 500® Dispersion Index (the Dispersion Index to its friends), might be loosely described as a “VIX® for dispersion.” But what is it? Why is it called that? And what is it good for? A short introduction is in order.
Measuring Market Opportunity
Dispersion is a fundamental measure of risk and opportunity in the stock market; it measures how differently stocks are performing, or are expected to perform. Dispersion is a complementary measure to market volatility; the latter measures overall fluctuations in stock averages like the S&P 500, while dispersion measures fluctuations in stocks relative to each other.
We measure dispersion historically by the observed spread of stock returns (as in S&P DJI’s regular monthly dispersion dashboard). Separately, we can derive an expectation for future dispersion from listed options. The Dispersion Index is based on such expectations for dispersion over the next 30 calendar days.
The Dispersion Index is published as an annualized figure, so that the initial DSPX level of 26.81 implies a market expectation that the spread of annualized S&P 500 stock returns will have a standard deviation of 26.81% over the next month. Exhibit 1 shows the historical hypothetical levels of the index over the period for which data are available.
A Market Standard for Tradeable U.S. Equity Dispersion
The Dispersion Index was launched in collaboration between Cboe and S&P Dow Jones Indices, using the Cboe Volatility Index® (VIX) and the S&P 500 universe as core building blocks. The VIX methodology is applied to both S&P 500 index options and options on selected S&P 500 constituents, with maturities either side of the next 30 days. The difference between the option prices for the S&P 500’s single-stock constituents and prices for options on the index tells us how much more movement the market anticipates in stocks. This is, in essence, an expectation for future dispersion. Full details of the calculation are available in the methodology.
What DSPX Tells Us: The Opportunity Index
The Dispersion Index’s stablemate, VIX, is known for offering a premier gauge of market sentiment—hence its moniker as “The Fear Index,” as well as being known as an often inaccurate but nonetheless useful predictor for future volatility.
The information encoded in the Dispersion Index is related, but different: by measuring how differently stocks are expected to perform, dispersion assesses the magnitude of the potential rewards (or potential embarrassment) from active stock selection. In this sense, DSPX might be more appropriately monikered as “The Opportunity Index.”
Illustrating its potential credentials as a “predictor” of future stock-picking opportunities, Exhibit 2 compares the index level to the actual S&P 500 dispersion measured over the subsequent 30 calendar days. Like its stablemate, DSPX would have been an often inaccurate but nonetheless informative indicator.
The use of the S&P 500 as the starting equity universe and the integration of the VIX methodology connects the Dispersion Index to a broad ecosystem of tradeable equity and volatility products and means that DSPX may in the future become “tradeable” itself.
Until such time, by collaborating to create the Dispersion Index, Cboe and S&P Dow Jones Indices are providing market participants with a real-time, comprehensive indicator for near-term dispersion in the world’s largest equity market.The posts on this blog are opinions, not advice. Please read our Disclaimers.