IN THIS LIST

Introducing the iBoxx USD Emerging Markets Broad Index Series

InsuranceTalks: Indexing Covered Calls

Unlocking Yield: Harnessing Dividend Opportunities in China A-Shares

TalkingPoints: Get to Know the S&P 500 Daily Covered Call Indices

S&P/ASX Australian Fixed Interest Indices – A Look Back on the Past Decade

Education - Mar 13, 2024

Introducing the iBoxx USD Emerging Markets Broad Index Series

Catalina Zota

Director, Fixed Income Product Management

S&P Dow Jones Indices

Introduction

Emerging market bonds are coming back into focus in 2024 due to their lower duration, higher yield and prospects of diversification when compared with those of developed markets. The iBoxx USD Emerging Markets Broad Index Series was launched on Jan. 31, 2024. The index series is designed to offer a comprehensive view of the USD emerging market bond universe while upholding minimum standards of investability and liquidity. The iBoxx USD Emerging Markets Index Series is powered by S&P Global Market Intelligence’s bond pricing, an independent multisource pricing provider used by market participants to value portfolios.

Please note that throughout this paper we use the following abbreviations.

iBoxx USD Emerging Markets Broad Sovereign & Sub-Sovereign Investment Grade: iBoxx USD EM IG
iBoxx USD Emerging Markets Broad Sovereign & Sub-Sovereign High Yield: iBoxx USD EM HY
iBoxx USD Liquid Investment Grade: iBoxx USD DM IG
iBoxx USD Liquid High Yield: iBoxx USD DM HY

Introducing the iBoxx USD Emerging Markets Broad Index Series: Exhibit 1

As rate hikes by the U.S. Federal Reserve appear to be ending, emerging economies are shifting back into focus and market attention is drawn to the need for better strategies that track the distinctiveness of these economies: higher inflation, higher long-term economic growth potential, the potential for political turmoil and a shifting regional focus. Hard currency emerging market debt could provide higher yields and shorter duration than developed market bonds. Starting in early 2022, the U.S. Federal Reserve embarked on a journey of raising interest rates to curb inflation. In January 2022, the rate was 0.08%. Over the course of 2022 and 2023, 11 rate increases were executed, reaching a high of 5.33% in August 2023. During this same period, emerging market USD IG bonds had yields almost identical to developed market USD IG bonds—an average yield of 5.23% for bonds in the iBoxx USD EM IG versus 5.16% for bonds in the iBoxx USD DM IG. It is interesting to note that in the last five months of 2023, bond yields for the iBoxx USD DM IG and iBoxx USD EM IG remained close to the Federal Funds rate of 5.33%. In comparison, there were consistently larger gaps between the iBoxx USD EM HY and iBoxx USD DM HY, which averaged 9.95% and 7.92%, respectively, over this two-year period. The average bond yield in the iBoxx USD EM IG proved to be slightly more attractive, outperforming that of the iBoxx USD DM IG by 8 bps on average.

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Education - Mar 06, 2024

InsuranceTalks: Indexing Covered Calls

Insurance Talks is an interview series where insurance industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing.

Robert Scrudato joined Global X in 2023 as an Options Research Analyst monitoring its Covered Call suite and other Risk-Managed ETFs.

Chandler Nichols joined Global X in 2021. In his current role as a Product Specialist, he works closely with the research analysts and sales team to maintain and promote client-facing research content, as well as communicate insights with clients and internal stakeholders around the globe.

S&P DJI: Why are some insurance companies implementing equity-based covered calls in their portfolios?

Chandler: “Consistency” is key, and equity-based covered call strategies may exemplify this in a meaningful way. By selling a level of upside participation in a stock or stock index in exchange for a premium, the return potential over the outcome period may be defined by the trajectory of the underlying asset and the sold option contract’s specifications. This offers the potential for a reduction in downside risk relative to owning the equity asset by itself. By mitigating potential equity downside risk through covered call writing, insurance companies may obtain a lower level of asset return dispersion than with a relatively more unpredictable set of liabilities found within a portfolio of insurance policies.

Over the past 20 years of monthly S&P 500^® total returns (240 total observations), 23 of those months (9.5% of all observations) saw negative returns of 5% or lower. We believe this number is elevated relative to investor expectations, which tend to view broad U.S. index-based returns as normally distributed. For example, harvesting the volatility risk premium that is commonly found within listed equity options markets may have been particularly useful in reducing an equity portfolio’s volatility in 2022, a challenging market environment in which the Federal Reserve raised interest rates at a precipitous pace.

S&P DJI: What are the potential benefits of an index-based approach to covered call investing?

Chandler: The “rules-based predictability” of an index-based covered call strategy is meaningful to our previous point on covered call portfolio implementation. Index-based covered call strategies seek to reflect a consistent stream of hypothetical option premia that may assist in the reduction of equity return dispersion, which insurance company portfolios may seek to limit. Furthermore, these strategies contain a specified set of rules behind both the stock portfolio and the options overlay.

Passive investment strategies typically seek exposure to the underlying holdings of an equity benchmark that is well known to the investor community to which an insurance company may already have exposure within its equity holdings. Furthermore, these same covered call strategy rules typically include contract specifications such as the level of the intrinsic value of an option (“moneyness”), the time until expiration, the contract type and the process of rolling written call options. When combined, there is greater clarity as to the performance of rules-based hedged equity exposures.

S&P DJI: How are covered calls traditionally used in portfolios?

Robert: Covered calls are generally utilized in an effort to harvest option premia and create a source of current income while simultaneously seeking to provide a level of risk management. By applying such a strategy, an effective cap is placed on the price appreciation potential that may be realized through their underlying investment, depending on the strike price of the option. Although this could create a situation in which the strategy trails the performance of its reference asset or underlying index when it’s on an upward trajectory, the positive performance needs to breach the strike price of the sold call option plus any option premium income to outperform. Moreover, the premia generated may help the covered call strategy outperform in instances when the reference asset or underlying index is moving negatively. Similarly, it may also demonstrate positive performance when the underlying instrument is trending in a relatively flat or choppy pattern due to the consistent incorporation of option premia. The reinvestment potential that exists for these option premia is why a covered call strategy is often described as a total return strategy.

Education - Mar 06, 2024

Unlocking Yield: Harnessing Dividend Opportunities in China A-Shares

Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

Introduction

In our previous study titled "Exploring China A-Share Dividends and High Yield Strategy Performance," we delved into the Chinese dividend market. We found that historically, portfolios composed of high dividend yield stocks in China A-shares have consistently outperformed hypothetical broad market portfolios and those comprised of low dividend yield stocks. In this paper, we aim to show how indexing methods can be employed to harness opportunities presented by high dividend yield strategies in the China A-shares market.

The Importance of Dividends

Dividends play a pivotal role in China A-shares equity investments for three reasons: 1) They constitute a substantial portion of total return in the equity market; 2) Dividend strategies can offer an alternative source of income; 3) Empirical research has shown that dividends as a factor have historically generated excess returns.

Dividend Contribution to Total Returns

While the significance of dividends in contributing to equity total return is widely acknowledged globally, particularly in the U.S. market where dividends and dividend reinvestment have accounted for over one-third of the S&P 500^® total return since 1936, the situation in the China A-shares market differs. Here, dividends contribute to almost 20% of the total returns, a notable but comparatively smaller proportion compared to the U.S. stock market. Interestingly, despite similarities in the long-term price return between the China A-shares market, the U.S. and the global market, differences in dividend contributions play a crucial role in the variance of total returns. This suggests significant potential for growth in dividend payments within the China A-shares market (see Exhibit 1).

Dividend Contribution to Total Return in the Equity Market: Exhibit 1

Alternative Income Strategy

Traditionally, fixed income has been the primary asset class for income-seeking investors. However, from 2008 to 2022, we witnessed a prolonged period of declining interest rates, especially in the U.S., posing challenges for investors aiming to generate income. In response, some market participants have turned to dividend strategies within the equity market to explore yield opportunities. Since 2022, led by the U.S. Federal Reserve, major markets like the U.S. have transitioned into a new phase of rising interest rates, with the federal funds rate exceeding 5% as of February 2024. In contrast, China has experienced a downward trend in interest rates, making dividend strategies more relevant in the China A-shares market. Further insights into the yield comparison will be provided in a following

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Education - Mar 01, 2024

TalkingPoints: Get to Know the S&P 500 Daily Covered Call Indices

Arlene Habib

Senior Analyst, Multi-Asset Indices, Product Management

S&P Dow Jones Indices

Parth Shah

Director, Derivative Indices

S&P Dow Jones Indices

The S&P 500^®Daily Covered Call Index assesses the performance of a daily buy-write strategy, combining hypothetical long positions in the S&P 500 (TR) with hypothetical short positions in daily, PM-settled S&P 500 options using a dynamic strike selection. Including two subindices, the index series offers valuable insights into the value and potential income of its underlying components. This innovative approach serves as a distinctive mix of indexing and options and is a potential tool for those seeking equity performance with a focus on income.

1. What is the S&P 500 Daily Covered Call Index Series?

The S&P 500 Daily Covered Call Indices measure the performance of the components of a daily buy-write strategy using an S&P 500 (TR) equity position and listed S&P 500 Weeklys^SMOptions one day from their maturity date. The series is comprised of a broad, commingled index strategy and two subindices intended to provide specific views of the strategy’s components.

2. What are the component indices of the S&P 500 Daily Covered Call Index Series? The series is composed of the main S&P 500 Daily Covered Call Index along with the:

- S&P 500 Daily Covered Call Index - Call Only, which measures the performance of only the short call component the S&P 500 Daily Covered Call Index and the cash component.
- S&P 500 Daily Covered Call Index - Income Only, which measures the total theoretical cash from call writing and the dividends from the S&P 500 Daily Covered Call Index.

3. How do the S&P 500 Daily Covered Call Indices reflect an income component?

The strategy reflected by the index combines the benefits of indexing with the theoretical income-generating potential of covered call options. One of the primary characteristics of covered call strategies is their ability to generate consistent income, which may potentially be increased by selling a call option daily.

The income story is further complemented by the theoretical dividends paid on the long S&P 500 (TR) position, which accounts for the daily reinvestment of all ordinary dividends on the S&P 500.

Additionally, hypothetical premiums collected daily may act as a supplementary source of returns beyond asset appreciation, providing potential downside protection and incremental return in flat markets.

Based on back-tested data, the index would have demonstrated a 23.03% gross premium yield, reflective of the cumulative sum of option premiums over the index value, and a net premium yield (premium adjusted by payout value) of 0.54% from June 1, 2022, to Dec. 29, 2023.

Talking Points: Get to Know the S&P 500 Daily Covered Call Indices: Exhibit 1

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Education - Feb 26, 2024

S&P/ASX Australian Fixed Interest Indices – A Look Back on the Past Decade

Jessica Tan

Principal, Fixed Income Indices

S&P Dow Jones Indices

Kangwei Yang

Director, Fixed Income Indices

S&P Dow Jones Indices

Introduction

Launched in October 2011, the S&P/ASX Australian Fixed Interest Index provides a broad measure of the performance of the Australian bond market. Since its inception, the index and its subindices have been widely utilized among asset managers, including serving as benchmarks for Australian-focused ETFs.

Evolution of the Market

In 1983, the Australian dollar was moved to a floating exchange rate, which led to its internationalization. Trading activity in the Australian dollar grew significantly and it is now one of the most actively traded currencies globally. This has played an important role in the development of the AUD bond market, which is a key market for investors both domestically and internationally.

Over the past 10 years, the overall size (by notional outstanding) of the AUD bond market—as represented by the S&P/ASX Australian Fixed Interest 0+ Index—more than doubled, increasing from AUD 615 billion in late 2013 to AUD 1,327 billion at the end of 2023 (see Exhibit 1). The outstanding notional of AUD-denominated Australian government bonds grew at a faster pace than corporate bonds during the past decade, increasing 127.3% and 82.5%, respectively.

As the market grew, Australian government and semi-government bonds remained the cornerstone of the bond market, representing close to 90% of the overall notional outstanding of the index.

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