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Talking Points: The S&P Access China Enterprises Enhanced Value Index

TalkingPoints: Understanding the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index

Why Does the S&P 500® Matter to Brazil?

Getting Smarter About Saving For College: Introducing the S&P Target Tuition Inflation Index

Practice Essentials: Measuring Volatility in Australia

Talking Points: The S&P Access China Enterprises Enhanced Value Index

The S&P Access China Enterprises Enhanced Value Index seeks to measure the performance of 100 Chinese companies with securities with attractive valuations that are eligible for the Stock Connect programs. Only one share class is selected to represent each company.

  1. What is the rationale behind the construction of the index?

The value factor is one of the oldest and most-established risk premiums in financial markets. Historically, stocks with attractive valuations have tended to outperform the broader market over medium- to long-term periods. The value premium exists in China’s A-share market1 and the Hong Kong market.2 With the introduction of the Stock Connect programs, new opportunities are emerging for value investors focusing on China.

The China A-share market looks expensive. As of Aug. 31, 2018, the S&P China A BMI Domestic traded at 15.7x trailing 12-month earnings versus the S&P Emerging BMI at 13.7x. More surprising, dual-listed stocks (those that trade as A-shares and H-shares) were trading at a large premium on the mainland. The premium or discount of A-shares relative to H-shares has been caused by market liquidity conditions and market participant structures and preferences, among other aspects. The prevalence of stock price differences may exist for quite some time and then tend to move toward long-term convergence.

The S&P Access China Enterprises Enhanced Value Index aims to benefit from a larger opportunity set, including onshore and offshore markets and relative premium or discount.

  1. How does the index work?

The index is constructed from the universe of southbound and northbound trading of the Shanghai-Hong Kong and the Shenzhen-Hong Kong Stock Connect programs. This includes ChiNext stocks.

It selects the 100 Chinese companies with attractive valuations based on three fundamental measures: book value-to-price, earnings-to-price, and sales-to-price ratios. The index is weighted by the product of market cap and value score.

For dual-listed companies, only the cheaper share classes would be considered. A buffer rule is in place to reduce turnover of existing constituents—the index does not switch share classes unless the premium is more than 5% at the rebalancing every six months.

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TalkingPoints: Understanding the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index

Aside from typical bonds, how can we get exposure to fixed income? Meet our S&P/BM&F One-Day Interbank Deposit 3Y Futures Index, which provides exposure to the Brazilian DI rate using futures.

  1. What is the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index?

The index is designed to measure the performance of a hypothetical portfolio holding a three-year One-Day Interbank Deposit (DI) Futures Contract. The DI contract is on the Brazilian one-day interbank rate, which is used by Brazilian banks to lend and borrow from each other. The contract’s objective is to provide a way to hedge for or speculate on short-term Brazilian interest rates. The index is constructed from futures contracts and includes a provision for the replacement of the index futures contract (also referred to as “rolling”). This replacement occurs over a one-day rolling period every six months, which is on the second-to-last business day of the month in December and June (also known as the rolling date). The index is designed for use by institutional investment managers, mutual fund managers, professional advisors, and insurance companies.

  1. What are some key benefits of the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index?

The index offers a benchmark for financial institutions to measure the return on their holdings and can serve as the base of an investment vehicle, as the index is easy to replicate. The futures market in Brazil, especially DI futures, is highly liquid, making the index easier to replicate than the underlying bonds. Since the  index is based on futures, it is calculated in total return and excess return versions. Also, it is calculated in U.S. dollars, which makes it accessible outside of Brazil.

The excess return index includes the price return and roll yield, while the total return version incorporates the assumption of collateral being reinvested at the overnight rate.

  1. How can the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index benefit market participants in Brazil?

First of all, working with our partner B3 brings transparency to the local market on the exposure to the DI rate that is close to three years. This index provides the opportunity for a local fixed income investment vehicle in the Brazilian market that would provide diversification and could be used to gain core fixed income exposure or to hedge current positions. When comparing the risk/return profile with other local indices, the S&P/BM&F One-Day Interbank Deposit 3Y Futures Index significantly outperformed.

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Why Does the S&P 500® Matter to Brazil?

Contributor Image
Priscilla Luk

Managing Director, Global Research & Design, APAC

S&P Dow Jones Indices

The S&P 500 is a renowned benchmark for large-cap U.S. equities.  The index is designed to measure 500 leading companies and captures approximately 80% coverage of investable market capitalization in the U.S. equity market.  As of year-end 2017, over USD 9.9 trillion was benchmarked to the S&P 500 alone, with indexed assets making up USD 3.4 trillion of this total.[1]  Exchange-traded products based on the S&P 500 have been cross-listed in various markets across the globe, but what creates the international appetite for U.S. equities, especially the S&P 500?  

In this paper, we will:

  • Compare the S&P 500 to the leading equity benchmark in Brazil;
  • Explore the significance of the S&P 500 in the global equity market; and
  • Compare S&P 500 performance to that of active U.S. large-cap funds.

COMPARISON OF THE S&P 500 AND THE IBOVESPA

The S&P 500 and the Bovespa Index (Ibovespa) are widely regarded as primary performance indicators for the U.S. and Brazilian equity markets, respectively. Both indices have been commonly used as benchmarks for investment in domestic stocks or equity funds. However, the indices vary significantly due to the different economic landscapes and financial market developments they reflect.

The S&P 500 comprises 500 companies and represents around 80% of the market cap of the U.S. equity market, while the Ibovespa measures the performance of the more actively traded and more representative stocks of the Brazilian equity market, covering approximately 85% total value traded on the B3 in the preceding 12-month period. Both are free-float, marketcap-weighted indices, but the S&P 500 has much greater stock diversification than the Ibovespa.

Compared with the Ibovespa, the S&P 500 is much more diverse in terms of the weight of constituents held in the index. The 10 largest S&P 500 members represent only 21.2% of the index, and the largest component, Apple, has a weight of just 3.9%. In contrast, the 10 largest stocks in the Ibovespa dominate 54.1% of the index, and the largest two members, Vale S.A. and Itau Unibanco Holding SA Pfd, carry stock weights as high as 13.0% and 10.2%, respectively (see Exhibit 1).

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Getting Smarter About Saving For College: Introducing the S&P Target Tuition Inflation Index

Contributor Image
Qing Li

Director, Global Research & Design

S&P Dow Jones Indices

INTRODUCTION

“It’s 2018 and Americans are more burdened by student loan debt than ever. In fact, the average student loan debt for Class of 2017 graduates was $39,400, up six percent from the previous year… Americans owe over $1.48 trillion in student loan debt, spread out among about 44 million borrowers. That’s about $620 billion more than the total U.S. credit card debt.”

As reported by the College Board,[1] education costs have risen at an alarming rate in the past three decades, with an increase of 129% for private nonprofit four-year institutions and an increase of 213% for public four-year institutions.  From 1987-1988 until 2017-2018, tuition rose from USD 15,160 to USD 34,740 per year for private nonprofit four-year institutions, and in the same time period public four-year institution tuition rose from USD 3,190 to USD 9,970 per year, adjusted to reflect 2017 U.S. dollars.

As CNBC tried to put that into perspective, they pointed out in an article that a 1988 graduate of Harvard University would have spent USD 17,100 on tuition during their senior year.  Now, in their 50s, they would have to pay USD 44,990 in tuition for their child to attend Harvard today.  That makes the current cost of tuition more than 2.5 times as much as it was in 1988—a markup of 163%.[2]

Also to keep track of college tuition and fees, the U.S. Bureau of Labor Statistics publishes a college tuition and fees item as part of the Consumer Price Index (CPI).  This item is a component of the tuition, other school fees, and childcare index, and it is included in the education and communication group of the CPI.  The college tuition and fixed fees item accounts for about 55% of the weight of the tuition and other school fees index and is the largest component of this index.[4]

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Practice Essentials: Measuring Volatility in Australia

Launched in March 2013, the real-time S&P/ASX 200 VIX® is designed to measure the expected 30-day volatility of the Australian benchmark equity index,the S&P/ASX 200. It uses the same methodology as the widely followed CBOE Volatility Index (VIX),which is designed to measure market expectations of near-term volatility embedded in S&P 500® options prices. Since its introduction in 1993, VIX has been viewed as the “investor fear gauge” for the equity market.  In March 2004,the CBOE Futures Exchange (CFE) began trading futures on VIX,and this has become one of the most successful futures products traded on the CFE.Due to growing interest and demand from investors,the CFE extended trading hours for VIX futures in June 2014.[1]

The success of VIX derivatives is largely due to their potential ability to hedge against the U.S. equity market.  Since VIX spot is derived from S&P 500 options prices and the equity options market is largely driven by market hedgers, VIX spot usually increases when investors rush to buy put options to protect their market exposure in a foreseeable bear market.  By the same token, VIX spot tends to decline when investors have a more optimistic view and reduce their hedging.  From Jan. 1, 2000, to June 29, 2018, the correlation between VIX spot and the S&P 500 was approximately -73%.  Exhibit 1 shows a clear negative correlation between VIX and S&P 500 returns.

The negative correlation between VIX and the S&P 500 indicates that these two indices often move in opposite directions.  Additionally, this negative correlation tends to be more pronounced in a stressed market than in a market rally.  In other words, when the equity market declines sharply, VIX usually rises quickly; when the equity market rises, VIX generally declines slowly or hovers at a relatively low level.  As a rule of thumb, high VIX levels are typically associated with a bear market. 

Although market participants cannot trade VIX spot itself, they can use derivatives that track VIX, including futures and options.  These derivatives may have different characteristics than the spot index, but they still maintain the potential hedging property of the spot index.  Exhibit 2 shows the correlations among the S&P 500, VIX spot, and two VIX futures benchmark indices in the U.S. 

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