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Biotech Brings Life Into Equities: The S&P Biotechnology Select Industry Index

Talking Points: What's Beyond the S&P/CLX IPSA? Getting to Know the S&P/CLX Indices

Talking Points: The S&P Access China Enterprises Enhanced Value Index

TalkingPoints: Understanding the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index

Why Does the S&P 500® Matter to Brazil?

Biotech Brings Life Into Equities: The S&P Biotechnology Select Industry Index

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Louis Bellucci

Senior Director, Index Governance

S&P Dow Jones Indices

INTRODUCTION

Developed in 1999 and jointly managed by S&P Dow Jones Indices and MSCI, the Global Industry Classification Standard® (GICS® ) assigns companies to a single classification at the sub-industry level according to its principal business activity using quantitative and qualitative factors, including revenues, earnings, and market perception. The sub-industry is the most specific level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

The companies primarily engaged in the research, development, manufacturing, or marketing of products based on genetic analysis and genetic engineering are classified in the Biotechnology sub-industry, the only sub-industry in the Biotechnology industry. It includes companies primarily engaged in the research, development, manufacturing and/or marketing of products based on genetic analysis and genetic engineering. Included are those specializing in protein-based therapeutics to treat human diseases and excluded are companies manufacturing products using biotechnology without a health care application.

COMPOSITION

As of Sept. 28, 2018, there are 124 companies with a total float-adjusted market capitalization of USD 879,614.95 million in the S&P Biotechnology Select Industry Index.  The largest company in the index is AbbVie Inc (ABBV), with a float-adjusted market cap of USD 143,219.94 million.  The index is modified equal-weighted, and the largest company weight in the index is ACADIA Pharmaceuticals Inc (ACAD), at 1.9%.  Approximately 11.8% of the index weight is from large-cap stocks in the S&P 500®, with 2.6% from the S&P MidCap 400® and 11.0% from the S&P SmallCap 600®.  The mean market cap is USD 7,092.90 million, the median market cap is USD 1.299.83 million, and the minimum market cap is USD 323.17 million. Nearly 75% of the index weight is considered micro cap and therefore is not in the S&P Composite 1500®, but is in the S&P Total Market Index (TMI).  The top 10 holdings sum to 14.8% of the S&P Biotechnology Select Industry Index (see Exhibit 1). 

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Talking Points: What's Beyond the S&P/CLX IPSA? Getting to Know the S&P/CLX Indices

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Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Dow Jones Indices

The S&P/CLX IPSA is a renowned benchmark for Chilean equities, including nearly 90% of Chile’s equity market, and serves as the parent index for a wide-range of S&P/ CLX Indices. Explore how S&P Dow Jones Indices and Bolsa de Santiago’s partnership is providing a diverse set of tools for investors looking to access Chile’s evolving markets.

1. What’s included in the S&P/CLX Fixed Income Indices that seek to track bonds in the Chilean market?

Jaime: The S&P/CLX Fixed Income Indices have two large series of sovereign indices, nominal rate, and real rate indices, known as the S&P Inflation-Linked Indices. As you can see in Exhibit 1, these indices are divided into long maturities and short maturities. The detailed maturity "buckets" or partitions, are 0-1, 1-3, 3-5, 5-7, 7-10, and 10+ years, while the grouped maturity “buckets” are 0-1, 1-5, 5-10, and 10+ years. Both sets of indices and the benchmark indices, which cover the entire nominal and real curve, are calculated in U.S. dollars.

2. Why were the indices split in this fashion, and why are they issued in a non-local currency?

Jaime: First, it is important to have indices in different currencies (in this case U.S. dollars), so that they can be used locally and by international investors. The indices are split by maturities because the curve does not move the same way in the short term as it does in the long term, so there are detailed references that can be used as benchmarks for those asset managers who have short-, medium-, or long-term bond strategies.

We wanted to develop a set of tools that could provide data to inform investors across geographies and that could be applied across a range of strategies. The indices can also serve as the basis for investment products, such as ETFs or index funds, because they are easy to replicate. This would lead to a more transparent and liquid way to tailor allocations to meet investment goals.

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Talking Points: The S&P Access China Enterprises Enhanced Value Index

The S&P Access China Enterprises Enhanced Value Index seeks to measure the performance of 100 Chinese companies with securities with attractive valuations that are eligible for the Stock Connect programs. Only one share class is selected to represent each company.

  1. What is the rationale behind the construction of the index?

The value factor is one of the oldest and most-established risk premiums in financial markets. Historically, stocks with attractive valuations have tended to outperform the broader market over medium- to long-term periods. The value premium exists in China’s A-share market1 and the Hong Kong market.2 With the introduction of the Stock Connect programs, new opportunities are emerging for value investors focusing on China.

The China A-share market looks expensive. As of Aug. 31, 2018, the S&P China A BMI Domestic traded at 15.7x trailing 12-month earnings versus the S&P Emerging BMI at 13.7x. More surprising, dual-listed stocks (those that trade as A-shares and H-shares) were trading at a large premium on the mainland. The premium or discount of A-shares relative to H-shares has been caused by market liquidity conditions and market participant structures and preferences, among other aspects. The prevalence of stock price differences may exist for quite some time and then tend to move toward long-term convergence.

The S&P Access China Enterprises Enhanced Value Index aims to benefit from a larger opportunity set, including onshore and offshore markets and relative premium or discount.

  1. How does the index work?

The index is constructed from the universe of southbound and northbound trading of the Shanghai-Hong Kong and the Shenzhen-Hong Kong Stock Connect programs. This includes ChiNext stocks.

It selects the 100 Chinese companies with attractive valuations based on three fundamental measures: book value-to-price, earnings-to-price, and sales-to-price ratios. The index is weighted by the product of market cap and value score.

For dual-listed companies, only the cheaper share classes would be considered. A buffer rule is in place to reduce turnover of existing constituents—the index does not switch share classes unless the premium is more than 5% at the rebalancing every six months.

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TalkingPoints: Understanding the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index

Aside from typical bonds, how can we get exposure to fixed income? Meet our S&P/BM&F One-Day Interbank Deposit 3Y Futures Index, which provides exposure to the Brazilian DI rate using futures.

  1. What is the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index?

The index is designed to measure the performance of a hypothetical portfolio holding a three-year One-Day Interbank Deposit (DI) Futures Contract. The DI contract is on the Brazilian one-day interbank rate, which is used by Brazilian banks to lend and borrow from each other. The contract’s objective is to provide a way to hedge for or speculate on short-term Brazilian interest rates. The index is constructed from futures contracts and includes a provision for the replacement of the index futures contract (also referred to as “rolling”). This replacement occurs over a one-day rolling period every six months, which is on the second-to-last business day of the month in December and June (also known as the rolling date). The index is designed for use by institutional investment managers, mutual fund managers, professional advisors, and insurance companies.

  1. What are some key benefits of the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index?

The index offers a benchmark for financial institutions to measure the return on their holdings and can serve as the base of an investment vehicle, as the index is easy to replicate. The futures market in Brazil, especially DI futures, is highly liquid, making the index easier to replicate than the underlying bonds. Since the  index is based on futures, it is calculated in total return and excess return versions. Also, it is calculated in U.S. dollars, which makes it accessible outside of Brazil.

The excess return index includes the price return and roll yield, while the total return version incorporates the assumption of collateral being reinvested at the overnight rate.

  1. How can the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index benefit market participants in Brazil?

First of all, working with our partner B3 brings transparency to the local market on the exposure to the DI rate that is close to three years. This index provides the opportunity for a local fixed income investment vehicle in the Brazilian market that would provide diversification and could be used to gain core fixed income exposure or to hedge current positions. When comparing the risk/return profile with other local indices, the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index significantly outperformed.

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Why Does the S&P 500® Matter to Brazil?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

S&P Dow Jones Indices

The S&P 500 is a renowned benchmark for large-cap U.S. equities.  The index is designed to measure 500 leading companies and captures approximately 80% coverage of investable market capitalization in the U.S. equity market.  As of year-end 2017, over USD 9.9 trillion was benchmarked to the S&P 500 alone, with indexed assets making up USD 3.4 trillion of this total.[1]  Exchange-traded products based on the S&P 500 have been cross-listed in various markets across the globe, but what creates the international appetite for U.S. equities, especially the S&P 500?  

In this paper, we will:

  • Compare the S&P 500 to the leading equity benchmark in Brazil;
  • Explore the significance of the S&P 500 in the global equity market; and
  • Compare S&P 500 performance to that of active U.S. large-cap funds.

COMPARISON OF THE S&P 500 AND THE IBOVESPA

The S&P 500 and the Bovespa Index (Ibovespa) are widely regarded as primary performance indicators for the U.S. and Brazilian equity markets, respectively. Both indices have been commonly used as benchmarks for investment in domestic stocks or equity funds. However, the indices vary significantly due to the different economic landscapes and financial market developments they reflect.

The S&P 500 comprises 500 companies and represents around 80% of the market cap of the U.S. equity market, while the Ibovespa measures the performance of the more actively traded and more representative stocks of the Brazilian equity market, covering approximately 85% total value traded on the B3 in the preceding 12-month period. Both are free-float, marketcap-weighted indices, but the S&P 500 has much greater stock diversification than the Ibovespa.

Compared with the Ibovespa, the S&P 500 is much more diverse in terms of the weight of constituents held in the index. The 10 largest S&P 500 members represent only 21.2% of the index, and the largest component, Apple, has a weight of just 3.9%. In contrast, the 10 largest stocks in the Ibovespa dominate 54.1% of the index, and the largest two members, Vale S.A. and Itau Unibanco Holding SA Pfd, carry stock weights as high as 13.0% and 10.2%, respectively (see Exhibit 1).

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