CDX Index

What Is a CDX Index?

A CDX index is a family of benchmark products that bundle credit default swap (CDS) contracts on a fixed group of companies into a single tradable instrument. Each CDS is a contract that compensates the buyer if a company defaults on its debt, so a CDX index works like a basket of default protection. The two main North American families are CDX.NA.IG, which covers investment-grade companies, and CDX.NA.HY, which covers high-yield bond issuers. The indices are issued in numbered series and rolled to new series periodically.

The name "Dow Jones CDX" is an older label. The family was once associated with the Dow Jones name, so you may still see it in older articles, but the products are now simply called CDX.

How It Works

The buyer of protection pays a regular premium, quoted as a credit spread in basis points, to the seller. If a company in the index defaults, the seller compensates the buyer and the index is adjusted. Investors use CDX indices to:

• Take a view on credit conditions across a whole sector or market
• Hedge a portfolio of corporate bonds against broad credit deterioration
• Trade a single instrument instead of many individual CDS contracts

The most recent series, called the on-the-run series, is typically the most actively traded and has the most reliable prices.

Advantages and Risks

CDX indices offer diversification and liquidity compared with trading individual CDS, and their prices give a useful snapshot of market-wide credit sentiment. However, they are complex. Their value can diverge from the bonds an investor actually owns, a problem known as basis risk. Because CDS are private contracts, they also carry counterparty risk, meaning the other side of the trade might not pay. Losses can be large and can build quickly during periods of market stress.

For individual investors, CDX indices are mainly relevant as indicators of credit market health rather than as products to hold directly, since they are typically traded by institutions.