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Equal-Weight Indexing: One-Stop Shopping for Size and Style

TalkingPoints: The Path of an Institutional Investor - How Indices Are Fueling GPIF's Green Objectives

TalkingPoints: Institutional Carbon Efficiency: Exploring the Tools Japan's GPIF is Using to Achieve Green Objectives

Talking Points: Introducing the S&P 500® Dividend Aristocrats® Bond Select 30 Index

Talking Points: The S&P 500® Bond Mega 30 Index Series

Equal-Weight Indexing: One-Stop Shopping for Size and Style

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Louis Bellucci

Senior Director, Index Governance

S&P Dow Jones Indices

INTRODUCTION

The S&P Equal Weight U.S. Indices include the equal-weight versions of the widely used S&P 500®, S&P 100, S&P MidCap 400®, and S&P SmallCap 600®.  The equal-weight indices include the same constituents as their respective market-cap-weighted indices, but each company is allocated a fixed equal weight in the index at each quarterly rebalance.  The result is a simple and elegant way to access broad market returns with exposure to the size (small-cap premium) and style (value) factors.

Created in 1957, the S&P 500 was the first broad U.S. market-capweighted stock market index.  Today, it is the basis of many listed and over-the-counter investment instruments.  Launched in 1983, the S&P 100 is a sub-set of the S&P 500 and includes 100 of the largest, most stable companies in the S&P 500 with listed options.  Sector balance is considered in the S&P 100 composition across multiple industry groups.

Following research in the early 1990s by Fama and French that showed the small-cap premium,[1] demand grew for mid- and small-cap indices, especially with quality screens.  To meet this demand, the S&P MidCap 400 and S&P SmallCap 600 were created in 1991 and 1994, respectively.  Sizes are determined by unadjusted full market capitalization.  As of Nov. 30, 2018, a company’s market cap must be greater than or equal to USD 6.1 billion in order to be eligible for the S&P 500, between USD 1.6 billion and USD 6.8 billion for the S&P MidCap 400, and between USD 450 million and USD 2.1 billion for the S&P SmallCap 600.  The combination of the S&P 500, S&P MidCap 400, and S&P SmallCap 600 is measured by the S&P Composite 1500®.

In addition to the equal-weight versions of the broad U.S. benchmarks, S&P Dow Jones Indices (S&P DJI) also calculates individual sector indices based on the Global Industry Classification Standard® (GICS®) for the S&P 500, S&P MidCap 400, and S&P SmallCap 600.  Developed in 1999 and jointly managed by S&P DJI and MSCI, the 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 sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

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TalkingPoints: The Path of an Institutional Investor - How Indices Are Fueling GPIF's Green Objectives

Institutional investors are increasingly shifting their strategies to incorporate environmental factors into their portfolios. Beyond their important commitment to addressing climate change directly, data continue to mount on the performance impact of environmental risks at the company level. To exemplify this trend, on Sept. 24, 2018, Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, selected new environmental benchmarks launched by S&P Dow Jones Indices (S&P DJI) to achieve its green objectives.

1. How did S&P DJI become GPIF’s carbon efficient index provider?

Kana: In November 2017, GPIF released a request for proposal for global environment investment strategies. After many collaborative discussions with S&P DJI, Trucost ESG Analysis, Japan Exchange Group, and GPIF, S&P DJI was able to create an index series that serves to promote not only environmental disclosures in Japan but also in companies around the world. We also developed new carbon efficient indices, and GPIF selected the S&P/JPX Carbon Efficient Index for the Japanese equity portion and the S&P Global Ex-Japan LargeMidCap Carbon Efficient Index for the non-Japanese equity portion to serve as benchmarks for ESG business strategies. These strategies were created in collaboration with Trucost ESG Analysis, which is an environmental research company that is part of S&P Global and has expanded their coverage to cover all of TOPIX.

2.Why did GPIF and S&P DJI undertake this project in the first place?

Ryan: S&P DJI was able to align our index methodology with GPIF’s mission of achieving long-term returns while reducing environmental risk. As signatories of the Principles for Responsible Investment, GPIF and S&P DJI are committed to promoting responsible investment. As the leading index provider, S&P DJI’s partnership with Trucost puts it in the best position to be able to provide the E portion of environmental, social, and governance (ESG) criteria in the index methodologies.

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TalkingPoints: Institutional Carbon Efficiency: Exploring the Tools Japan's GPIF is Using to Achieve Green Objectives

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Andrew Innes

Head of Global Research & Design

S&P Dow Jones Indices

Exploring the Tools Japan’s GPIF is Using to Achieve Green Objectives

Climate change is creating risks in the real world, as well as potentially unpriced risk in financial markets, creating a need for new tools to monitor and manage the evolving risk landscape. The S&P Carbon Efficient Indices are being used by institutional investors, including the Government Pension Investment Fund (GPIF) in Japan, to reduce exposure to high-carbon companies in a systematic way, while maintaining a risk/return profile similar to that of their benchmarks.

1. What's driving the increasing desire by institutional investors to understand, measure, and manage environmental impacts in their portfolios and investments, and why now?

Neil: I think the environmental performance of companies has become more of a mainstream concern, and the main driver for this is climate change and the need to reduce carbon emissions. If you look at the Paris Agreement in 2015, over 190 countries signed up for reduction targets, and if those reduction targets are going to be met, then it is almost certain that the price of carbon will have to rise. Indeed, looking at the EU emissions trading system price of carbon, in September 2018, it reached over 25 euros per metric ton, which is a five-fold increase over what it was in May 2017. Therefore, with that cost implication, companies are being encouraged to report on these matters, and we’ve seen the G20 create a task force that has produced guidance on this. In Japan, the stewardship code was revised in 2017 to encourage companies to proactively look at environmental matters, and in France, the energy and transition law requires not only companies to report but also asset owners and investment managers. Given all these developments, it's not surprising that some more thoughtful investors are starting to look at carbon performance as part of their investment process.

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Talking Points: Introducing the S&P 500® Dividend Aristocrats® Bond Select 30 Index

1. Why is this index being introduced now?

REITs are a popular and efficient way for market participants to access the real estate asset class. The potential for strong long-term total returns combined with other key investment characteristics, such as a tendency for high dividend yields, inflationhedging properties, and a relatively low correlation with other asset classes, have contributed to the appeal of REITs. However, because they are widely considered to be rate-sensitive assets, there is substantial concern among market participants that REITs will underperform when interest rates increase from their historically low levels. Although there is evidence that REITs have typically fared well over full cycles of rising rates, U.S. REITs have often experienced sharp sell-offs in short-term periods in which interest rates have increased significantly. Given this context, there is considerable interest in a U.S. REIT index that may be less sensitive to interest rate movements.

2. How does the index work?

The index is a subset of the Dow Jones U.S. Select REIT Index that only includes REITs in property sectors that typically have relatively short-term lease durations. These sectors are apartments, hotels/resorts, manufactured homes, and self-storage. Theoretically, REITs with shorter lease durations should be less sensitive to interest rates, given that they can more quickly reprice their rental agreements. For example, a hotel effectively has overnight leases and can rapidly respond to market changes. Similarly, apartment owners typically engage in one-year leases with tenants, making the average lease duration of apartment REITs under one year. On the other hand, office, health care, and other major REIT sectors generally have much longer-term lease durations—giving them more bond-like cash flow characteristics. The index also employs a 5% cap on stock weights to reduce single-stock concentration.

3. What are the characteristics and historical performance attributes of the index?

Over the full length of the back-test from September 2000 to November 2016, the Dow Jones U.S. Select Short-Term REIT Index outperformed the Dow Jones U.S. Select REIT Index 90% of the time during periods in which the 10-year U.S. Treasury Bond yield increased by more than 50 bps within a period of four months or less. For periods in which the 10-year U.S. Treasury Bond yield increased by more than 100 bps in a period of four months or less, the index outperformed nearly 99% of the time. Interestingly, the index did not consistently outperform or underperform the broader REIT market in periods of falling rates.

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Talking Points: The S&P 500® Bond Mega 30 Index Series

The indices in the S&P 500 Bond Mega 30 Index Series are designed to measure 30 of the largest bonds from the S&P 500 Investment Grade Corporate Bond Index and the S&P 500 High Yield Corporate Bond Index. The index series is designed to be a more liquid and investable subset of the S&P 500 Bond Index.

  1. What is the S&P 500 Bond Mega 30 Index Series?

The S&P 500 has been the flagship index tracking the U.S. equity market for over 50 years. Over the past few years, corporations have issued large amounts of debt, likely taking advantage of the lower interest rate environment. The S&P 500 Bond Index Series seeks to track debt issued by companies in the S&P 500.

The S&P 500 Bond Mega 30 Investment Grade Index is composed of 30 bonds,representing the largest investment-grade bond issues of the S&P 500. The bonds are selected from the S&P 500 Investment Grade Corporate Bond Index. 

The S&P 500 Bond Mega 30 High Yield Index is composed of 30 bonds, representing the largest high-yield bond issues from the S&P 500. The bonds are selected from the S&P 500 High Yield Corporate Bond Index.

In addition, there are two maturity-based indices that track the 30 largest bond issues in the three- to five-year and five- to seven-year maturity ranges for both investmentgrade and high-yield issuers, as well as a one- to three-year maturity-based index for the investment-grade series.

  1. What are some of the key benefits of the S&P 500 Bond Mega 30 Index Series?

Over the past few years, the growing debt pool issued by corporations has driven the need for independent indices to track different aspects of that market. The new S&P 500 Mega Bond Indices track bonds with larger issue sizes that typically trade with greater frequency and enhanced transparency, and therefore tend to have higher liquidity.

  • Liquidity: To help ensure liquidity, the largest bond by par amount outstanding is used for each issuer.
  • Composition: Comprises bonds from the widely followed, large-cap companies tracked in the S&P 500 with one bond per issuer represented.
  • High Quality: As of July 31, 2018, the weighted average rating for the S&P 500 Bond Mega 30 Investment Grade Index was A-/A3/A, and for the S&P 500 Bond Mega 30 High Yield Index the weighted average rating is BB/Ba2/BB+ by S&P Global Ratings/Moody’s/Fitch, respectively.
  • Small Constituent Number: Each index comprises 30 bonds for manageability.
  • Weighting: Each index is equal weighted to avoid overexposure to any one issuer.
  • Performance: The indices closely replicate performance of their significantly broader parents S&P 500 Investment Grade Corporate Bond Index and the S&P 500 High Yield Corporate Bond Index.
  • Transparency: The index aims to make opaque bond markets more transparent by focusing on issuers that are already familiar to market participants. Results are published on spdji.com.

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