The Nasdaq-100 Engle 10% Index: Where Innovation Meets Nobel Prize Winning Research

UBS and Nobel Laureate Robert Engle have collaborated to develop a new index that leverages an innovative volatility forecasting method with the goal of benefiting investors.

The innovation — used in the Nasdaq-100 Engle 10% Index (the “Index”) — is a new approach designed to forecast the volatility of the underlying asset and adjust the allocation accordingly. The key differentiator of the Index is in the “Volatility Control” mechanism, which uses a forward-looking volatility forecast as opposed to backward-looking realized volatility. Depending on what price action the volatility indicates, the Index adjusts its exposure to the underlying asset, the Nasdaq-100 Total Return™ Index (“Nasdaq-100 TR”), while targeting a volatility of 10% intraday.

This approach means that throughout the trading day, when forecasted volatility is higher than 10%, the Index will reduce exposure to the Nasdaq-100 TR. When forecasted volatility is lower than 10%, the Index will allocate more than 100% weight to the Nasdaq-100 TR.

Managing volatility when investing is important because increases in volatility are often “associated with prices going down. And when volatility comes down, it's typically associated with asset prices going up,” according to Engle. By leveraging volatility as a predictor for price action, investors may be able to use volatility as an enhancer to risk-adjusted return as opposed to an inhibitor to performance.

The volatility forecast model is calibrated frequently as new price movements emerge. This new capability means the Index has a more sophisticated way of quantifying risk. As a result, investors have the potential to more effectively capture the upswings and weather the inevitable downswings of the market. When volatility is well-forecasted and controlled, it can help manage risk.

Engle first developed this approach by forecasting volatility for a universe of 10,000 assets using data from exchanges worldwide. This analysis gave Engle insight into how volatility rises and falls and its impact on returns. Engle explains, “It's exactly when the volatility is high, that stock prices are not where you expect them to be. And that's a risk.”

His work also revealed the importance of making fast adjustments to changes in volatility. Quick rebalancing helps investors to catch gains when volatility drops and get protection when it rises. Therefore, the Index uses intraday data and rebalances up to seven times daily. The idea behind this approach is that investors benefit when they avoid exposure to the drawdowns often associated with high volatility periods and capture the upside quickly when volatility decreases. This speed is important because a drop in volatility may be quickly proceeded by a rise in the overall market.

Quick moves are also important in an increasingly globalized world. As Engle explains, “we think that the morning is the most volatile period of the day because new information has been gathered overnight. European markets and Asian markets have been going all night. So, when the market opens, there's a lot of information.” To benefit from that new information, investors need speed and more windows to adjust throughout the day.

The Nasdaq-100 Engle 10% Index brings a new level of sophistication and insight to an increasingly dynamic market.

To learn more about the index, including, but not limited to selected risk considerations, please visit: indices.ubs.com/ubengl10.

Disclaimer

The Nasdaq-100 Engle 10% Index (the “Index”) was developed by UBS AG, based in part on the Nasdaq-100 Total Return™ Index, which is owned and has been licensed by Nasdaq, Inc. to UBS AG for use in the Index. The Index applies a volatility control mechanism developed by UBS AG in collaboration with Engle Volatility Consulting LLC (“Engle Consulting”), the research principal of which is Robert F. Engle. UBS AG owns and is the current sponsor of the Index.  The Index cannot be invested into directly.  The Index is not guaranteed to succeed at meeting its objectives.  While volatility controls may result in less fluctuation in rates of return as compared to indices without volatility controls, they may also reduce the overall rate of return as compared to products not subject to volatility controls.

This material has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell any instrument or to participate in any particular trading strategy.  UBS AG and its affiliates (“UBS”) do not sponsor, endorse, sell, or promote any insurance products that reference the Index (“Products”) and UBS does not make any warranty or representation whatsoever, expressly or impliedly, as to the results to be obtained from the use of the Index, the figure at which the Index stands, or the advisability of or results to be obtained by using, investing in, or trading Products linked to the Index.  Past performance is not necessarily indicative of future results. UBS shall not be liable to any person for any errors or omissions in the Index or in the calculation of the Index or under any obligation to advise any person of any errors or omissions therein and shall not be liable for any damages arising out of any person’s use of, or reliance upon, the information contained herein.  A decision to invest in any Products should not be made in reliance on any of the statements set forth in this communication . Prospective investors are advised to make an investment in Products only after carefully considering the risks associated with investing in the Product and should refer to the corresponding consumer product brochure for more information about such risks.   Nasdaq may, at its sole discretion, alter the components of the Nasdaq-100 Total Return™ Index.  UBS is not responsible or liable for any changes to the Nasdaq-100 Total Return™ Index and is not involved in the calculation, creation, or maintenance of the Nasdaq-100 Total Return™ Index.   

Engle Consulting is not an investment adviser, does not guarantee the accuracy and completeness of the Index or any Products or any data or methodology either included therein or upon which it is based. Neither the Index nor any Products are sponsored, endorsed, sold or promoted by Engle Consulting or Robert F. Engle.  Engle Consulting and Robert F. Engle do not make any representation or warranty, express or implied, to any financial institution, investor of or counterparties to the Index or Products or to any member of the public regarding Products or the advisability of investing in securities generally or in the Index or Products particularly.

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