IN THIS LIST

Elevating the Aristocrats

Rethinking the U.S. Investment-Grade Corporate Bond Market

Talking Points: A New Way to Look at Corporate Bonds

Looking Beyond Traditional Benchmarks to Add Value in Emerging Markets

Shariah in a Fast-Changing World

Elevating the Aristocrats

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Jason Giordano

Director, Fixed Income

S&P Dow Jones Indices

Pairing the S&P 500® Dividend Aristocrats® With the S&P 500/MarketAxess Investment Grade Corporate Bond Index

Both the S&P 500 Dividend Aristocrats and the S&P 500/MarketAxess Investment Grade Corporate Bond Index were designed to measure the performance of blue-chip, high-quality companies of the S&P 500.  They both focus on well-capitalized U.S. companies with strong credit fundamentals and proven capital management.  Taken together, they offer an opportunity for steady income, protection against market volatility, and enhanced liquidity.

  • The S&P 500 Dividend Aristocrats is designed to measure the performance of S&P 500 constituents that have increased dividends every year for at least 25 years.
  • The S&P 500/MarketAxess Investment Grade Corporate Bond Index tracks the largest-issued, high-quality bonds of S&P 500 constituents. The index offers efficient exposure to the broader U.S. investment-grade corporate bond market, while also including bonds that tend to trade in larger volume and with higher frequency, thus offering greater depth of liquidity. 
  • Combining the complementary attributes of the S&P 500/MarketAxess Investment Grade Bond Index and the S&P 500 Dividend Aristocrats can potentially result in increased yield, reduced volatility, and higher risk-adjusted returns.

Constituents of the S&P 500 Dividend Aristocrats or the S&P 500/MarketAxess Investment Grade Corporate Bond Index are limited to just 200 of the S&P 500 companies, but there are only 26 companies that reside in both.  These include the household names such as AT&T, CocaCola, Exxon Mobil, Johnson & Johnson, McDonald’s, Procter & Gamble, and Walmart. 

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Rethinking the U.S. Investment-Grade Corporate Bond Market

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Jason Giordano

Director, Fixed Income

S&P Dow Jones Indices

Designed to track the largest and most frequently traded high-quality bonds issued by the well-known companies in the iconic S&P 500®, the S&P500/MarketAxess Investment Grade Corporate Bond Index provides a new way to look at the U.S. investment-grade corporate bond market.


EXECUTIVE SUMMARY
  • The S&P 500/MarketAxess Investment Grade Corporate Bond Index consists of high-quality issuers from the S&P 500; companies with global revenue streams, strong balance sheets, and a demonstrated capacity to service debt payments.
  • It seeks to track the largest-issued bonds by size—these issues tend to trade in larger volume and with higher frequency, hence offering greater depth of liquidity.
  • The index offers a more efficient way to view the broader U.S. investment-grade corporate bond market by tracking fewer bonds while achieving similar or better performance than the benchmark.

    EXPANSION OF U.S. CORPORATE CREDIT

    The accommodative conditions created by low interest rates and strong investor demand have resulted in an explosive expansion of corporate credit since the financial crisis. Over the 10-year period beginning Dec. 31,2007, the amount of U.S. corporate debt outstanding increased by over USD 4 trillion.[1]  U.S. companies have tapped the bond markets for a number of purposes: efficient capital management (e.g., refinancings, share buybacks, dividends, etc.), increased capital expenditure (R&D, fixed assets, etc.), and to fund merger and acquisition activity.  S&P 500 companies have been at the forefront of this expansion and were responsible for approximately 70% of the increase in outstanding corporate debt over the period studied (see Exhibit 3).

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Talking Points: A New Way to Look at Corporate Bonds

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Jason Giordano

Director, Fixed Income

S&P Dow Jones Indices

The S&P 500/MarketAxess Investment Grade Corporate Bond Index seeks to measure the performance of the largest, most frequently traded bonds issued by high-quality companies in the S&P 500.

1. How does this index compare to broader U.S. investment-grade corporate bond indices?

The S&P 500/MarketAxess Investment Grade Corporate Bond Index captures similar characteristics of the broader U.S. investment-grade market, such as total return, yield, and duration. However, by focusing on the largest, most frequently traded bonds of well-known companies in the S&P 500, the index provides improved relative liquidity versus issues in the broader corporate bond market.

2. How is the S&P 500/MarketAxess Investment Grade Corporate Bond Index constructed?

The S&P 500/MarketAxess Investment Grade Corporate Bond Index is a subindex of the larger S&P 500 Investment Grade Corporate Bond Index. The index was created in an effort to identify the largest, most frequently traded, high-quality bonds issued by members of the S&P 500. The first step in designing the index was to isolate only high-quality issuers.

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Looking Beyond Traditional Benchmarks to Add Value in Emerging Markets

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John Welling

Director, Global Equity Indices

S&P Dow Jones Indices

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

INTRODUCTION

As emerging markets have grown in size and importance, emerging market equities have become a core part of many portfolio allocations. In addition, the increased diversity and liquidity of emerging equity markets have made strategies commonly used to manage developed market portfolios (such as tactical allocations across regions and size segments) much more accessible to emerging market investors.

Despite these trends, the use of more complex asset allocation strategies within emerging market equities remains quite limited, as the vast majority of market participants continue to gain exposure to this asset class either via index-linked products that track traditional benchmarks or through active managers with mandates closely tied to those benchmarks. While accessing emerging markets through a single holding linked to a conventional benchmark can be an effective, low-cost way to obtain unbiased exposure to this asset class, evidence indicates that using a more discerning approach to managing emerging market portfolios may potentially add value in the same ways it can in the U.S. and other developed markets.

ALL EMERGING MARKET BENCHMARKS ARE NOT CREATED EQUAL

While most broad emerging market benchmarks tend to be highly correlated, there are methodological differences that can result in substantive performance differentials over time.  Therefore, it is important to understand how emerging market benchmarks are constructed.  For example, in the trailing 15-year period ending Feb. 28, 2018, the S&P Emerging BMI gained 580% on a cumulative total return basis, while the MSCI Emerging Markets Index gained a comparatively smaller 540% for the same time period.  Analysis shows that the difference in performance was driven by two main factors.  First, the MSCI Emerging Markets Index has an approximate weight of 15% in South Korea, while South Korea has been ineligible for the S&P Emerging BMI since 2001, when it was reclassified as a developed market. South Korea has underperformed 11 of the 16 countries that have been classified as emerging markets by S&P Dow Jones Indices over the 15-year period studied.  Second, the S&P Emerging BMI has significantly broader coverage, including large-, mid-, and small-cap stocks, while the MSCI Emerging Markets Index includes only large- and mid-cap stocks.  Over this period, the S&P Emerging SmallCap outperformed the S&P Emerging LargeMidCap by more than 146%. 

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Shariah in a Fast-Changing World

2017 was a strong year for equity markets globally, but we saw even stronger performance from Shariah equity markets.  While the S&P Global BMI (an all-cap global index) rose 24.8% for the year, its global Shariahcompliant counterpart rose 27.4% (see Exhibit 1).  In the U.S., the S&P 500® saw a gain of 21.8%, while the Shariah-equivalent U.S. index rose 22% for the year.  Since 2008, when financial stocks were in the doldrums, the outperformance of broad Shariah-based indices has highlighted their absence from the market.  In 2017, the performance of the global financials sector was an impressive 24.1%, indicating that there were some other factors at work.

A closer look revealed that the information technology sector, which reflected over 30% of the weight of global Shariah equities, grew 41.3%, far overtaking the financials gain and making up for the loss that Shariah indices suffered due to the absence of financials.  Information technology and financials make up the largest difference of sector weights between broad-based global equities and their Shariah-compliant counterparts (see Exhibit 2).

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