Credit Default Swap Index (CDX) — formerly Dow Jones CDX

The Credit Default Swap Index (CDX) is a tradable benchmark that bundles many single-name credit default swaps (CDSs) into a single index to measure and trade credit risk for North American and emerging‑market issuers. Launched in the early 2000s, the CDX provides a standardized, liquid way for market participants to hedge or speculate on changes in corporate credit quality.

How the CDX works

• A CDS is an over‑the‑counter derivative that transfers the credit risk of a single issuer (like insurance against default).
• The CDX aggregates many CDS contracts into an index (a “basket”) so investors can gain or hedge exposure to a portfolio of credits in one trade.
• Typical CDX series include 125 reference names and are split into investment‑grade (IG) and high‑yield (HY) segments.
• The index is rebalanced (or “rolls”) roughly every six months: names can enter or leave the series based on credit events, upgrades/downgrades, or other eligibility changes.
• S&P Global manages the main CDX lineups, including North American IG and HY variants and Emerging Markets series.

Common CDX series

• CDX North American Investment Grade
• CDX North American Investment Grade High Volatility
• CDX North American High Yield
• CDX North American High Yield High Beta
• CDX Emerging Markets
• CDX Emerging Markets Diversified

Benefits

• Standardization and exchange‑style trading improve transparency versus single‑name OTC CDSs.
• Higher liquidity and typically tighter spreads make hedging cheaper and more efficient than buying many individual CDS contracts.
• Broad diversification: a single CDX position covers credit risk across many issuers.
• Useful as an early indicator of shifting credit sentiment because credit spreads often move before other economic signals.

Loan‑only variant: LCDX

• The LCDX is a separate index composed of leveraged‑loan CDSs (loan‑only CDSs).
• It offers exposure to secured, typically lower‑quality corporate loans and is used by investors seeking high‑yield loan exposure with different risk/return characteristics than bond CDS indexes.

Key risks

• Complexity: understanding the index requires familiarity with CDS mechanics and the specific reference names.
• Counterparty and settlement risk can be meaningful in stressed markets.
• Liquidity risk: markets can thin during volatility, widening spreads and making execution costly.
• Market risk: CDX values move with credit spreads and macro credit conditions; sudden swings can produce large losses.

FAQ

Q: How does a CDS differ from a CDX?
A: A CDS covers credit risk for a single issuer; a CDX aggregates many CDSs to represent a portfolio of credit exposures.

Q: Who typically trades CDX indices?
A: Institutional players such as hedge funds, pension funds, asset managers, insurance companies, and some proprietary trading desks.

Q: Why choose a CDX over individual CDS contracts?
A: For diversification, lower transaction costs, greater liquidity, and the convenience of managing broad credit exposure in one trade.

Q: What does it mean when a CDX “rolls”?
A: The current series is retired and replaced by a new series with an updated list of reference entities to reflect market and credit‑quality changes.

Bottom line

The CDX is a widely used tool for benchmarking and trading credit risk across a diversified set of corporate issuers. It offers efficiency, liquidity, and broad exposure compared with single‑name CDSs, making it valuable for hedging and speculative strategies. However, its complexity, liquidity sensitivities, and market volatility mean it is best suited to experienced investors and institutions that can manage the associated risks.