IN THIS LIST

How Indexing Affects Shariah-Compliant Investing

Applying Sustainability to Sector Indices

Seeking Stable Income: The S&P 500® Quality High Dividend Index

InsuranceTalks: Incorporation of Sustainability

iBoxx iShares $ Corporate Bond Indices: Groundbreaking Index Construction Supports a Tradeable Listed Futures Product

How Indexing Affects Shariah-Compliant Investing

Contributor Image
Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Contributor Image
John Welling

Director, Global Equity Indices

S&P Dow Jones Indices

Contributor Image
Eduardo Olazabal

Associate Director, Global Exchange Indices

S&P Dow Jones Indices

Shariah-compliant investing has grown considerably in recent decades, as the Islamic investment community has demanded increasingly sophisticated investment solutions that adhere to the tenets of Islamic law. As a result, the need for high-quality, transparent, Shariah-compliant benchmarks has developed.  Today, Islamic indices serve a critical role in Islamic finance; these unique indices identify the universe of securities available for investment and define the way Islamic investors measure the markets.

Introducing Islamic Indices

Islamic indices are subsets of conventional benchmarks that include only companies that pass rules-based screens for Shariah compliance.  The resulting Shariah indices tend to be highly correlated to their conventional non-Shariah counterparts and provide Islamic investors with Shariah-compliant versions of a wide variety of popular benchmarks.  For example, the S&P 500® Shariah is a subset of the widely recognized S&P 500, and it includes only Shariah-compliant constituents of the S&P 500.

As with all Islamic financial products, a supervisory board of Islamic scholars oversees the rules governing Shariah-compliant indices.  The board is responsible for defining and maintaining the rules governing the Shariah screening process.  However, S&P Dow Jones Indices retains oversight on all other index methodology issues, including rules for company selection in the benchmark index, weighting and index maintenance.

The Ins and Outs of the Shariah Screening Process

Shariah screening is performed at two primary levels: business activity and financial ratios.  First, the business activities of each company are evaluated.  Companies with significant involvement in certain business activities prohibited by Shariah law are deemed noncompliant.  Activities that are generally considered noncompliant include conventional financial services, alcohol, tobacco, gaming, pork, pornography and most conventional media organizations.  After removing companies with noncompliant business activities, the remaining companies are examined for compliance with board-approved financial ratios.  Areas of focus include the degree of financial leverage and holdings of cash, receivables or interest-earning securities.

Exhibit 1 provides a comparison of the screening methodologies employed by the S&P Shariah Indices and Dow Jones Islamic Market™ Indices.  While the criteria evaluated are largely similar, there are some differences, as Shariah scholars have not reached a complete consensus on all aspects of Islamic finance.  For example, the Dow Jones Islamic Market Indices exclude defense companies, while these firms are allowed in the S&P Shariah Indices.  The calculations of accounting ratios also differ to some extent across the two index series.

How Indexing Affects Shariah-Compliant Investing: Exhibit 1

pdf-icon PD F Download Full Article

Applying Sustainability to Sector Indices

Contributor Image
Elizabeth Bebb

Director, Factor & Dividend Indices

S&P Dow Jones Indices

Contributor Image
Stephanie Rowton

Director, Head of Sustainability Indices EMEA

S&P Dow Jones Indices

Contributor Image
Barbara Velado

Senior Analyst, Research & Design ESG Indices

S&P Dow Jones Indices

Executive Summary

Sector-based index strategies are viewed by many investors as an effective way to express their views on macroeconomic, demographic and other trends while still achieving diversification.  Meanwhile, investors are increasingly looking for ways to incorporate sustainability considerations and personal values into all aspects of investing, including index construction.  Sector-based indices that factor in sustainability elements combine these two powerful trends and can help investors express their views on macroeconomic trends while applying a sustainability lens.

Sector indices need to account for the fact that sustainability elements don’t apply to each sector equally.  The most prominent example of this is that climate-related financial risks affect energy companies quite differently than banking institutions or other service companies.  This concept of materiality needs to be rigorously embedded throughout a sector index series.

In this paper, we explore why sector-based investing has become such a valuable tool for investors and how sustainability elements can be built into sector indices using consistent, materiality-based methodologies.

The Case for Sector Investing

Historically, a company’s sector has been shown to have a significant potential impact on the company’s stock performance, and the performance of specific sectors can vary dramatically, often reflecting broader economic conditions.  Sector indices can give investors an efficient way to express views about how various segments of the economy will perform while maintaining diversification within each sector and mitigating single-stock risk.

Achieving Diversified Exposure within Sectors

Companies in a sector tend to have similar exposure to external forces such as interest rates, inflation, gross domestic product growth, demographic trends, unemployment, technological developments, geopolitical risk and legal or regulatory changes.  For example, Consumer Discretionary companies tend to be sensitive to the strength of the economy, as well as consumer spending, sentiment and debt levels.

At the same time, each company in a sector also has a degree of idiosyncratic risk because of its business strategy, brand awareness, management team, supply chain and other factors that make up a company’s unique competitive positioning.  Going back to the Consumer Discretionary example, a company that generates most of its sales in the U.S. would be more sensitive to a U.S. recession than a company with a more geographically diverse customer base.  Similarly, a company that sources most of its products from offshore manufacturers would have more exposure to potential trade disruptions than a company that manufactures its goods locally.

By aggregating the performance of a representative subset of companies in a sector, sector indices provide insight into the performance of that sector while significantly reducing idiosyncratic risk of any one company.

Because all stocks in a sector share some level of macroeconomic risks, some investors use sector indices to express their view on the economic cycle.  A well-known example is the use of sector indices to position among cyclical and defensive sectors.  Cyclical sectors, such as Energy, Materials, Industrials, Consumer Discretionary, Financials and Information Technology, tend to be more sensitive to broader economic trends.  Defensive sectors, such as Consumer Staples, Health Care, Communication Services and Utilities, tend to be less sensitive to how the economy is performing.

pdf-icon PD F Download Full Article

Seeking Stable Income: The S&P 500® Quality High Dividend Index

Contributor Image
Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

With many countries raising interest rates to fight against inflation, the Russia-Ukraine conflict adding uncertainties to the energy supply, and repeat infection waves undermining economic activity, the world market has been struggling to recover from the COVID-19 crisis since 2020.  In turbulent times, a focus on quality stocks with high dividend yields may present a compelling investment solution for market participants seeking stable income.

The S&P 500 Quality High Dividend Index seeks to provide just such a solution—it selects stocks that rank within the top 200 of the S&P 500 by quality score and dividend yield (see Exhibit 1).  This order-indifferent approach ensures extensive and balanced exposure to both quality and dividend yield.  Constituents are equally weighted and rebalanced semiannually.

Seeking Stable Income: The S&P 500 Quality High Dividend Index: Exhibit 1

What Is Quality?

S&P Dow Jones Indices defines quality as a combination of profit generation, earnings quality and financial robustness (see Exhibit 2).  Together, these traits generally shield companies from the volatility of the economic cycle, making them slightly more immune to downturns.

Seeking Stable Income: The S&P 500 Quality High Dividend Index: Exhibit 2

pdf-icon PD F Download Full Article

InsuranceTalks: Incorporation of Sustainability

Contributor Image
María Sánchez

Director, Sustainability Index Product Management, U.S. Equity Indices

S&P Dow Jones Indices

Brishni Mukhopadhyay is Western Asset’s ESG Product Specialist and works with a range of clients across geographies to help integrate ESG (environmental, social and governance) considerations and design mandates to meet their sustainable and investment objectives.

María Sánchez is part of the Sustainability Indices Product Management team at S&P DJI, which enables market participants, including insurance companies, to align their products, investments, and decision-making processes with their value to achieve sustainable results and promote positive change.

S&P DJI: Are sustainability considerations important for insurers to consider?

Brishni: As long-term investors with business models centered around the assessment and pricing of risk, ESG considerations are paramount for

insurers to integrate holistically into their strategy, underwriting, investments, and relationships with stakeholders. Rapid acceleration in the frequency of natural disasters has rightfully increased the focus of the insurance sector

on climate risks, but there are additional areas of ESG risk that insurers need to assess and manage. These include product safety and cybersecurity, health and injury risks, shifts in consumer sentiment, human rights and supply chain management, as well as corporate governance and transparency.

Additionally, as ESG regulations on companies in the financial sector expand across the globe, insurance companies will need to navigate a complex set of requirements across the states and regions in which they operate.

These requirements, particularly for publicly traded insurance companies, are likely to include broader and more detailed disclosures, augmentation of climate modeling capabilities and more formalized oversight by boards and senior management.

It is therefore imperative that insurers analyze and understand how ESG risks can impact the policies they are underwriting and the issuers in their portfolios, and to strategically position themselves to benefit from ESG-related megatrends across their markets.

pdf-icon PD F Download Full Article

iBoxx iShares $ Corporate Bond Indices: Groundbreaking Index Construction Supports a Tradeable Listed Futures Product

Contributor Image
Nicholas Godec

Senior Director, Head of Fixed Income Tradables & Private Markets

S&P Dow Jones Indices

Innovative Index Design

The iBoxx iShares $ Corporate Bond Indices are the latest addition to the indices that comprise the liquid S&P Dow Jones Indices fixed income tradable ecosystem.  These groundbreaking indices were designed to be a suitable basis for USD corporate bond index futures, which didn’t exist prior to the formation of these indices and create easier market access for a wide variety of investors.

The two indices designed to underlie futures are the iBoxx iShares $ High Yield Corporate Bond Index (iBoxx iShares $ HY Corp Bond Index) and the iBoxx iShares $ Investment Grade Corporate Bond Index (iBoxx iShares $ IG Corp Bond Index).  As part of the iBoxx index series, these indices offer broad coverage of the USD high yield and investment grade liquid bond universes, providing investors with objective benchmarks against which they can measure and execute their market views.

We’ll summarize the iBoxx iShares $ HY Corp Bond Index construction methodology to highlight the unique process by which the iBoxx iShares $ Corporate Bond Indices are composed.  The process is identical for the investment grade index; however, the inputs reference the equivalent investment grade indices.

The iBoxx iShares $ HY Corp Bond Index is rebalanced monthly to match the holdings of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG ETF).  Specifically, the index cross-references the iBoxx USD High Yield Developed Markets Index (iBoxx $ HY DM Index) and the HYG ETF portfolio to form the index.  Then, the characteristics of the index universe are compared against the iBoxx $ Liquid High Yield Index (iBoxx $ LQ HY Index), the benchmark of the HYG ETF, to ensure the new index characteristics closely match the HYG ETF benchmark characteristics within defined bounds.  The characteristics are compared across ratings, sectors, duration, yield, bond count and bonds in common.

iBoxx iShares $ Corporate Bond Indices: Groundbreaking Index Construction Supports a Tradeable Listed Futures Product: Exhibit 1

pdf-icon PD F Download Full Article
Processing ...