What do CDS indices allow investors to do?

CDS indices, or Credit Default Swap indices, provide investors with a means to gain exposure to a diversified portfolio of credit risks within the credit markets through a single, tradable product. By allowing investors to buy or sell these indices, which represent a basket of credit default swaps on various underlying corporate or sovereign entities, they effectively enable participation in the credit derivatives market with less capital and lower transaction costs compared to individual single-name CDS.

This is particularly beneficial for investors seeking to express views on credit risk or hedge against credit events without the need to manage numerous individual positions. Each index encompasses multiple issuers, reducing the idiosyncratic risk associated with individual credit events and provides a more streamlined method of accessing the broad CDS market.

In contrast, options like selling single-name CDS products or taking positions in fixed-income securities do not fully utilize the unique advantages of CDS indices. Leveraging high-risk equities is distinct from the objectives and functions of CDS indices, as they focus on credit risk rather than equity risk.