IN THIS LIST

Comparing Iconic Indices: The S&P 500® and DJIA®

Aligning Income with ESG: The S&P ESG Dividend Aristocrats®

FAQ: S&P DJI’s Approach to the EU Low Carbon Benchmark Regulation Disclosure Requirements

SPIVA® Scorecards: An Overview

Talking Points: Adding ESG Transparency to Real Estate

Comparing Iconic Indices: The S&P 500® and DJIA®

INTRODUCTION

The S&P 500 and Dow Jones Industrial Average® (DJIA), both of which are designed to track U.S. large-cap companies, are two of the most iconic indices in the world.  These indices have changed the way that investors measure the stock market and benchmark investment portfolios.  They also serve as the basis for some of the world’s most successful index-linked products and derivative contracts.

At the end of 2019, we estimate that there was over USD 11.2 trillion benchmarked to the S&P 500, which includes USD 4.6 trillion passively tracking the index.  In comparison, there was USD 32 billion benchmarked to the DJIA, which includes USD 28 billion in passive assets.

According to our estimates above, the S&P 500 won the battle to attract assets.  However, the DJIA offers several advantages, including its simplicity and a longer live history—it celebrated its 125th anniversary on May 26, 2021.  As discussed in past research, the trading volumes of investment products linked to the DJIA are high relative to the amount of assets tracking it.

The S&P 500 and DJIA have similar long-term risk/return profiles, and their three-year rolling correlations are high.  However, there are important differences between the two indices that investors should consider.

  • Number of constituents
  • Size of the component companies
  • Weighting scheme
  • Sector representation
  • Fundamentals
  • Factor exposures

We will start by exploring areas in which these iconic indices are similar and then delve into the differences.

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Aligning Income with ESG: The S&P ESG Dividend Aristocrats®

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

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Ari Rajendra

Head of Thematic Indices

S&P Dow Jones Indices

INTRODUCTION

Over the past 10 years, total ETF assets tracking dividend-related strategies have increased eightfold, reaching USD 330 billion. Including mutual funds, we estimate that nearly USD 1.4 trillion of assets are tied to dividends (see Exhibit 1). This growth trajectory, which has coincided with the persistent low-rate environment since 2008, confirms that dividend strategies have remained a key part of income-seeking investor portfolios.

Aligning Income with ESG: The S&P ESG Dividend Aristocrats: Exhibit 1

Environmental, social, and governance (ESG) is an area that continues to reshape the investment landscape, with an increasing number of asset owners, asset managers, and service providers committed to responsible investing, based on data from the United Nations Principles for Responsible Investment (UN PRI). As of year-end 2020, the UN PRI signatories had at least USD 100 trillion in assets under management, a multi-fold increase in signatories and associated assets from 10 years prior.

A pioneer of dividend indexing, S&P Dow Jones Indices (S&P DJI) has continued to create, innovate, and maintain some of the most recognized dividend strategies in the indexing space, including the S&P Dividend Aristocrats Indices. This series of dividend indices targets companies that have had consistent dividend growth over time.  A measure of financial sustainability, this strategy aims to capture companies that have successful business operations and disciplined financial management.

In this next chapter, the S&P Dividend Aristocrats Series expands its scope beyond financial sustainability to include ESG considerations. Five indices have been launched as part of the newly created S&P ESG Dividend Aristocrats Series, offering access to multiple geographical regions including the U.S., global, and Europe (see Exhibit 2). These indices seek to track dividend growth stocks that simultaneously meet minimum ESG standards. In this paper, we explore S&P DJI’s innovative approach to incorporating ESG into the S&P Dividend Aristocrats Series.

Aligning Income with ESG: The S&P ESG Dividend Aristocrats: Exhibit 2

Broadly, we see the following meaningful implications for both ESG and dividend investors.

  • Low tracking error and comparable dividend yield: Compared to the S&P Dividend Aristocrats Indices, the equivalent ESG versions were found to have a relatively low tracking error to non-ESG counterparts and, on average, a minor reduction in dividend yield. Despite the additional ESG-related screens, these newly launched indices retained the key characteristics of dividend growth strategies.
  • Additional layer of sustainability: Dividend growth, which underpins the S&P Dividend Aristocrats investment philosophy, is considered a well-established approach to investing in dividends. Augmenting ESG criteria serves to further ensure selection of dividend payers with sustainable and ethical business practices, a combination that could reinforce the principles of sustainable dividend investing.
  • Enhancing diversification of ESG: ESG mandates are now presented with a range of new dividend indices for selection. With multiple geographical versions available (see Exhibit 2), ESG-focused investors have an opportunity to diversify from previously available ESG strategies and climate-related investments.

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FAQ: S&P DJI’s Approach to the EU Low Carbon Benchmark Regulation Disclosure Requirements

The EU Low Carbon Benchmark Regulation requires administrators of benchmarks (other than interest rate and FX) to comply with new requirements to disclose environmental, social, and governance (ESG) factors in their methodology documents and benchmark statements.  The delegated regulations ((EU) 2020/1816 and (EU) 2020/1817) for ESG disclosure (“Delegated Regulations”) are effective as of Dec. 23, 2020.

  1. What are the regulations, and what do they aim to achieve?  The EU Low Carbon Benchmark Regulation amends the EU Benchmark Regulation in two ways: first, it introduces two new benchmark classifications—EU Climate Transition Benchmarks (EU CTB) and EU Paris-Aligned Benchmarks (EU PAB)—and second, it requires administrators of ESG benchmarks to publish certain information.  Administrators of benchmarks that pursue ESG objectives must (i) publish an explanation of how key elements of the methodology reflect ESG factors; and (ii) explain in the benchmark statement how ESG factors are reflected for each benchmark or family of benchmarks.  The aims of the Delegated Regulations are to:
    • Create a common framework of requirements that promotes consistency, leading to greater comparability between benchmarks;
    • Clearly state if a benchmark pursues ESG objectives, helping investors to identify them; and
    • Generate greater transparency of a benchmark’s objectives to help investors understand them more easily.
  2. When did the requirements come into effect?  For EU benchmark administrators, the Delegated Regulations are effective as of Dec. 23, 2020.  For third-country (i.e., non-EU) benchmark administrators, the Delegated Regulations are effective as of Jan. 1, 2024.
  3. How does S&P DJI intend to meet the new EU ESG disclosure requirements?  S&P DJI has two benchmark administrators under the EU Benchmark Regulation (EU BMR):[2] S&P DJI Netherlands B.V. (S&P DJI BV), an EU benchmark administrator based in Amsterdam and authorized by the Dutch Authority for Financial Markets; and S&P Dow Jones Indices LLC (S&P DJI), a corporation based in New York.  For the purposes of the EU BMR, S&P DJI is an administrator located in a third country.  Under the EU BMR, non-EU (third-country) benchmark administrators have an extended period of time to implement the requirements of the regulation.[3]  On the other hand, EU benchmark administrators must implement the EU ESG disclosure requirements starting from Dec. 23, 2020.  In view of the different timelines for EU and third-country administrators, we are prioritizing the EU ESG disclosures for those benchmarks administered by S&P DJI BV.  For more information on S&P DJI’s implementation of the EU Benchmark Regulation, please refer to the Regulatory Information page of the S&P DJI website.

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SPIVA® Scorecards: An Overview

WHAT IS SPIVA?

S&P Indices versus Active (SPIVA) scorecards are semiannual reports published by S&P Dow Jones Indices that compare the performance of active equity and fixed income mutual funds against their benchmarks over different time horizons.  The inaugural scorecard was published in 2002 and focused on the U.S., and has since been extended to Australia, Canada, Europe, India, Japan, Latin America, South Africa, and the Middle East and North Africa (MENA).

WHAT IS UNIQUE ABOUT THE SPIVA SCORECARDS?

SPIVA scorecards are unique because they rely on datasets that address issues related to measurement techniques, universe composition, and fund survivorship.  While these issues are far less frequently discussed, they can have meaningful impacts on results.  In particular, the datasets correct for the following biases.

  • Survivorship Bias Correction: Many funds may merge or be liquidated during a given period. For someone making an investment decision at the beginning of the period, these funds are part of the opportunity set. Unlike other comparison reports, SPIVA scorecards account for the entire opportunity set—not just the survivors—thereby eliminating survivorship bias.
  • Apples-to-Apples Comparison:  Fund returns are often compared with popular benchmarks such as the S&P 500®, regardless of size or style classifications. SPIVA scorecards avoid this pitfall by comparing funds against benchmarks that are appropriate for that particular investment category.

For example, U.S. mid-cap value funds are compared with the S&P Midcap 400®Value, while the S&P SmallCap 600®Growth  serves as the benchmark for U.S. small-cap growth funds.

  • Equal-and Asset-Weighted Returns:  Average returns for a fund group are often calculated based on equally weighting the entire fund universe. An additional representation of how every dollar invested in each category fared in a particular period can be ascertained by weighting each fund according to its net assets. SPIVA scorecards show both equal- and asset-weighted averages.
  • Style Consistency: U.S., and Canada SPIVA scorecards measure consistency for each style category across different time horizons. Style consistency is an important metric because style drift (the tendency of funds to diverge from their initial investment categorization) can affect asset allocation decisions.
  • Quartile Breakpoints: In each category, dispersion in fund returns across different time horizons highlight the fund selection risk that market participants face.
  •  Data Cleaning: SPIVA scorecards avoid double counting multiple share classes in all count-based calculations. Typically, the share class with the highest assets under management at the beginning of the period is selected.  This is meant to be a scorecard for active managers, therefore index funds, leveraged and inverse funds, and other index-linked products are excluded.

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Talking Points: Adding ESG Transparency to Real Estate

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Adding ESG Transparency to Real Estate

More and more investors are integrating ESG risks into their investment process. Given the large size and specialized nature of real estate assets, the investment community has demanded sophisticated tools to more accurately identify real estate companies that own more sustainable properties and integrate this information seamlessly into their investment process.

S&P Dow Jones Indices has collaborated with GRESB, a leader in evaluating ESG characteristics of real estate companies, to create the Dow Jones Green Real Estate Indices. The indices, which utilize data from GRESB, are designed to be representative of the investment characteristics of conventional real estate benchmarks, but with an improved sustainability profile.

Index Offering

1. Why do real estate companies require a specialized approach to quantifying sustainability?

Dan: While sustainability considerations affect all industries, they are particularly relevant for the real estate sector. With an estimated 40% of all global carbon emissions being driven by the construction and operation of buildings, real estate is a particular industry of focus among institutional investors. Buildings are long-lived and typically cannot be moved to another place, which leaves them exposed to the direct localized consequences posed by sustainability risks: more stringent regulatory requirements; changing societal preferences for places to work, live, and play; and exposure to climate-related events such as flooding, water scarcity, and extreme weather conditions.

There's a growing recognition by companies and investors that ESG matters are fundamental to business performance and should be disclosed in financial reports. Businesses are also coming to realize that integrating ESG concerns into core business and financial decisions will generate new streams of data that can be used to enhance growth and sustainability.

Real estate is a complex business with varying degrees of control on construction quality and operational excellence. The GRESB framework is specifically tailored to real estate companies that seek to embrace industry best practices on the full range of ESG issues that can be material to shareholders.

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