OVERVIEW FROM A GLOBAL PERSPECTIVE
A decrement is an overlay applied to a given base index. A decrement index is constructed by deducting a predefined dividend or fee at predefined intervals from the total return of the base index.
S&P Dow Jones Indices (S&P DJI) has been publishing decrement indices since 2016. Initially using the term “synthetic” or “premium” in index names, we subsequently unified the naming convention to “decrement” indices. We have developed a transparent decrement framework through a series of decrement indices, including the S&P 500 Decrement Indices, S&P ESG Decrement Indices, and multi-asset decrement indices.
The decrement methodology can be overlaid on any of our globally accepted, independent underlying indices. The parameters used in the calculation of decrement indices can be customized based on product issuer or market participant requirements.
CHANGES IN DEMAND
One key trend we observed in 2021 was further expanding demand in Asia and the U.S. Being the first region to enter a zero or negative interest rate regime, Europe is ahead of other regions in the development of decrement index-linked products. A low-rate environment makes it challenging for issuers to provide attractive terms and triggers the search for a new underlying asset that could deliver cheaper optionality. Decrement indices were designed to provide a solution for this challenge. With interest rates dropping further globally after the pandemic began, we started to see growing demand for decrement indices in Asia and the U.S. as well.
Another key trend has been increasing interest in ESG and thematic benchmarks as the underlying indices for decrement strategies. ESG and megatrend investing have been growing steadily over time, and they tend to land in the spotlight during extreme events, such as the global pandemic. With ESG and thematic investing growing at a faster pace since the pandemic started, decrement strategies on these topics are picking up globally.