CDS Indices: CDX And iTraxx

Buying protection against one company defaulting means negotiating a single-name credit default swap on that one name — useful, but slow if you want exposure to credit risk across an entire sector or market. CDX and iTraxx solve this by bundling a fixed, standardized list of single-name CDS contracts into one tradeable index: CDX covers North American and emerging-market names, iTraxx covers Europe and Asia, and each comes in flavors like investment-grade or high-yield.

A new "series" of each index is issued roughly every six months with a refreshed constituent list — typically 125 investment-grade names or 100 high-yield names — each with an equal weight, so buying protection on the index means buying a small slice of protection on every name in the basket simultaneously. Because the composition is fixed and public, and the contract terms are standardized, these indices trade with far tighter bid-ask spreads and far more liquidity than any single-name CDS, making them the default tool for expressing a macro view on credit risk or hedging a broad credit portfolio quickly.

If one constituent actually defaults, it's removed from the index and settled separately, while the remaining index keeps trading with the rest of the basket — so the index price reflects the average credit risk of whoever is left standing, not a static snapshot from issuance.