IN THIS LIST

TalkingPoints: An Overview of S&P 500^® Sector Indices and 25 Years of GICS^®

Why S&P GSCI? Diversification and Historical Inflation Mitigation

A Historical Perspective on Factor Index Performance across Macroeconomic Cycles

TalkingPoints: The Democratization of Bond Markets and the Evolution of Fixed Income Indexing

Digging into African Debt with the iBoxx LSF USD African Sovereigns

Education - Nov 27, 2024

TalkingPoints: An Overview of S&P 500^® Sector Indices and 25 Years of GICS^®

Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

Fei Wang

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

Sherifa Issifu

Associate Director, U.S. Equity Indices

S&P Dow Jones Indices

1. What is GICS and why does it matter?

Celebrating 25 years in August 2024, the Global Industry Classification Standard (GICS) was developed by S&P DJI and MSCI in 1999 to establish a global standard for categorizing companies into sectors and industries. GICS was developed in response to the global financial community’s need for a complete, consistent set of global sector and industry definitions that enable comparisons by company, industry, and sector.

GICS provides four levels of granularity and currently comprises 11 sectors, 25 industry groups, 74 industries and 163 sub-industries. The hierarchical design of the coding system allows for an easy transition between GICS tiers: a company’s sub-industry classification determines — in decreasing order of granularity — its industry, industry group and sector membership. The complete GICS classification for each company is an eight-digit code with text description.

TalkingPoints: An Overview of S&P 500® Sector Indices and 25 Years of GICS®: Exhibit 1

The GICS structure has evolved over time to ensure that the company groupings provide an up-to-date reflection of market segments. These updates have historically impacted the number of segments at each level of the GICS hierarchy, and they can affect the definitions of various segments and the resulting company classifications.

TalkingPoints: An Overview of S&P 500® Sector Indices and 25 Years of GICS®: Exhibit 2

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Education - Nov 15, 2024

Why S&P GSCI? Diversification and Historical Inflation Mitigation

Brian D. Luke

Senior Director, Head of Commodities, Real & Digital Assets

S&P Dow Jones Indices

Rebecca Kaufman

Senior Associate, Commodities, Real & Digital Assets

S&P Dow Jones Indices

Financial markets in the “Roaring ‘20s” (of the 21^st century, that is) have been dominated by surging equity markets and bouts of volatility caused by a global pandemic, inflation, geopolitical upheaval and a technology sector that has driven equity markets to all-time highs. Throughout this period, balanced strategies have been able to reap the rewards—with commodities topping the performance charts. For example, either gold or broad commodities have led all asset classes in four of the past five years (see Exhibit 1).

As inflation may remain elevated, governments may continue to expand to budget deficits and geopolitical conflicts may continue to impact the global markets, we reflect on the importance of commodities and look to the S&P GSCI to quantify how the broad-based commodities index has outperformed when it matters most. We will also examine how commodity performance has responded to inflation, central bank easing and periods of geopolitical uncertainty. This analysis will provide a better understanding of the importance of commodities in a broader index context.

Measuring Asset Class Performance: Exhibit 1

When It Matters Most

The return of inflation to the global economy is one of the most significant risks to have emerged after decades of negligible price increases. After nearly a decade of zero-interest rate policy and quantitative easing, policy makers found themselves focused on the inflation-fighting side of their dual mandate. Equities and bonds tend to deliver below-average returns in rising inflation environments, while inflation-sensitive assets (such as commodities, inflation-linked bonds, REITs, natural resource stocks and gold) have historically been able to maintain performance during these periods. Commodity outperformance has delivered on its reputation as an inflation-sensitive asset, with the S&P GSCI up 40% and 26% in 2021 and 2022, respectively.

Going further back in time, broad commodities have done well when inflation was elevated and the U.S. Federal Reserve maintains a defensive posture. Breaking inflation into low, medium and high inflationary environments, commodities have experienced double-digit annual gains when inflation exceeded 2%. The average one-year return when inflation measured between 2% and 4% was 14.8%. Exhibit 2 highlights how the S&P GSCI has performed during inflationary periods relative to another broad commodity benchmark, the Bloomberg Commodities Index (BCOM).

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Education - Nov 14, 2024

A Historical Perspective on Factor Index Performance across Macroeconomic Cycles

Wenli Bill Hao

Director, Factors and Dividends Indices, Product Management and Development

S&P Dow Jones Indices

Rupert Watts

Head of Factors and Dividends

S&P Dow Jones Indices

Introduction

Systematic factor investing has been widely adopted by both institutional and individual market participants, especially after the Global Financial Crisis of 2007-2008. This investment approach seeks to provide systematic exposure to various risk factors, such as quality, momentum, growth, value, dividend, low volatility and size. By leveraging these factors, market participants seek to achieve more diversified portfolios in order to enhance overall risk-adjusted returns over the long term.

When considering factor investing, however, it is important to recognize that empirical evidence indicates that the performance can vary significantly depending on the prevailing economic environment. In this paper, we examine the influence of different economic regimes—characterized by levels of economic growth and inflation—on the performance of various S&P 500^® Factor Indices. Our findings may offer valuable insights for market participants interested in allocating to factor investments.

Macroeconomic Framework

To examine performance across different economic regimes, we must first establish a framework to categorize them. Our framework creates four possible regimes based on two key metrics: growth and inflation. To minimize the influence of noisy data, these economic conditions must persist for a minimum of three months before they are recognized as a regime.

The Growth Regime

The growth regime, whether rising or falling, is assessed by analyzing the month-to-month change in the U.S. Composite Leading Indicator (CLI). Developed by the Organization for Economic Co-operation and Development (OECD), the CLI is an index that provides early indications of turning points in business cycles, reflecting the fluctuations in economic activity around its long-term potential level. This indicator is measured as an amplitude-adjusted index with a long-term average value of 100.

A positive monthly change in the CLI compared to the previous month indicates that the CLI is increasing, suggesting that the economy grew over that month. Conversely, a negative change indicates a decline in economic growth.

The Inflation Regime

The inflation regime, categorized as either rising or falling, is determined by comparing the three-month average of the all-items U.S. Consumer Price Index (CPI) with the three-year moving average. If the three-month average exceeds the three-year average, it indicates rising inflation; if it falls below, it suggests falling inflation.

Four Macroeconomic Regimes

These growth and inflation metrics allow us to categorize historical economic conditions into four regimes as illustrated in Exhibit 1. The four quadrants below represent each of the four regimes.

Quadrant I: Rising growth and rising inflation
Quadrant II: Falling growth and rising inflation
Quadrant III: Falling growth and falling inflation
Quadrant IV: Rising growth and falling inflation

A Historical Perspective on Factor Index Performance across Macroeconomic Cycles: Exhibit 1

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Education - Nov 12, 2024

TalkingPoints: The Democratization of Bond Markets and the Evolution of Fixed Income Indexing

Jennifer Schnabl

Head of Fixed Income Core Indices

S&P Dow Jones Indices

1. What innovations have you seen in fixed income, and what’s the role of indices?

Fixed income markets have evolved tremendously over the last decade and continue to do so. Changes in fixed income market structure and constraints on bank balance sheets after the Global Financial Crisis both contributed to a more transparent and transactable bond market, with fixed income indices at the core. The growth of fixed income ETFs, bond portfolio trading, electronic trading and algorithmic trading have all occurred alongside the increased utility for fixed income indices and index-linked products. The resulting fixed income ecosystem has become the new marketplace for practitioners on both the sell-side and buy-side to source liquidity, gain exposures and manage risk. Fixed income indices have been, and continue to be, the instruments at the core of these vehicles.

S&P Dow Jones Indices’ (S&P DJI’s) index offerings have played a critical role in the evolution of the fixed income ecosystem, supporting greater access and democratization of fixed income instruments in the form of ETFs or index-linked securities. The bond markets have traditionally been difficult to access for many market participants. Indexation in fixed income has contributed to greater liquidity, transparency and accessibility for investors far and wide, providing access to an asset class that was inaccessible decades ago.

2. How is S&P DJI innovating in the fixed maturity indexing space?

Another recent product innovation has been the development of fixed maturity indices. We’ve seen the growth in the U.S. occur over the last 10 years, and it has begun this past year in Europe. Fixed maturity indices are an interesting concept that may provide investors with greater visibility into maturity and potential income, with a ‘fixed’ year in which the index will expire. This is important for many practitioners who have cash flow needs with a specific time schedule. In the U.S., where the market has already existed, we’ve seen an uptick in interest and growth in the last five years. In Europe, where the market is new, the number of asset managers launching fixed maturity vehicles has been notable.

For example, in the U.S. market, S&P DJI has carried a U.S. Municipal Bond Fixed Maturity Suite for over a decade and was one of the early adopters of this index construct as practitioners began utilizing indices to construct bond ladders. Our suite, the S&P AMT-Free Municipal Series, includes indices in consecutive maturity years from 2024 to 2030. As interest in European markets is newer, we have seen interest across corporate credit and sovereigns, both of which S&P DJI has capabilities in.

U.S. Fixed Maturity ETF AUM: Exhibit 1

The utility and use case of the fixed maturity index is the main driver of this growing popularity. These indices are typically launched as a suite of consecutive years, and one can construct a bond index ladder with the maturity years that are applicable to that investor. Cash flow needs that are required for specific years can be mapped to the respective years of the fixed income index.

3. What impact has fixed income indexing had on the bond market?

Fixed income indexing has been a core instrument in the democratization that the bond market has experienced over the last decade. Indexing and index-linked products enhance the ability to transact in basket or portfolio form. The ETF wrapper, with a fixed income index as the backbone, has opened access to the traditional bond market in a way that did not previously exist. The innovation and comfort in ETF creation/redemption protocols have also influenced how the bond market transacts and the growth of bond portfolio trading. What we’ve seen is this broader liquidity ecosystem emerge, with fixed income ETF trading, bond portfolio trading and bond algorithmic trading all intertwined, enhancing liquidity and redefining bond trading protocols from the past.

It’s incredible to think that 10 years ago, global fixed income ETF assets were less than USD 500 million, and today they are over USD 2 trillion,1 a testament to foundational shifts in the ecosystem. Indexing solutions that narrow in on liquidity or try to minimize transaction costs have played a key role in this growth. Our iBoxx® USD Liquid High Yield Index and iBoxx EUR Liquid High Yield Index, which seek to select a liquid subset of bonds from the broader universe, are prime examples of liquidity-focused indices that practitioners have used to navigate the changing landscape of fixed income.

The utility of ETFs and index-linked products has also emerged as a vehicle of choice in stressed markets, where accessibility, transparency and liquidity take center stage. In March 2020, we saw index-linked products like ETFs and credit default swap indices (CDX indices) serve as the go-to instruments for market participants who needed to transact, choosing these instruments over single bonds that were difficult and costly to access in an environment of poor liquidity. As the index-based product became the vehicle of choice during this period of stress, it also became the leading price indicator for the portfolio or index of constituents, a transparent representation of fair value for the individual bonds.

The growth of certain markets, such as leveraged loans, may also be connected to the proliferation of index-linked products in this asset class. The U.S. leveraged loan market as a whole has grown significantly over the last 10 years, from about USD 400 million to USD 1.2 trillion, as defined by the iBoxx USD Leveraged Loan Index, now rivaling the U.S. high yield bond market. This has been alongside the growth of the broader loan ecosystem, which includes index-linked products and derivatives in the loan space.

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Education - Nov 05, 2024

Digging into African Debt with the iBoxx LSF USD African Sovereigns

Jessica Tan

Principal, Fixed Income Indices

S&P Dow Jones Indices

Benedek Vörös

Director, Index Investment Strategy

S&P Dow Jones Indices

Introduction

Launched in June 2024, the iBoxx LSF USD African Sovereigns measures the performance of USD-denominated bonds issued by sovereign African entities that are domiciled in the African countries eligible for the Liquidity & Sustainability Facility (LSF) repo facility. The partnership index aims to aid the LSF in its objective to improve African sovereign eurobonds’ liquidity and sustainability by leveraging S&P Dow Jones Indices’ fixed income capabilities.

Development of Africa

Africa is the second-largest continent by size and has 54 countries, the highest number among all continents. Although gross domestic product (GDP) per capita is currently the lowest of all continents, Africa has plenty going for it in the decades ahead: rapid population growth, high fertility rates and a low median age, which could be engines of future economic growth. The current population is over 1.4 billion, the second-highest continent after Asia.

Looking at the last three decades up to 2023, the GDP of the countries that comprise the iBoxx LSF USD African Sovereigns has almost quadrupled, roughly in line with the world’s GDP growth and significantly better than the eurozone and the U.S.

Digging into African Debt with the iBoxx LSF USD African Sovereigns: Exhibit 1

African development in the past two decades has been supported by population growth: the annual growth rate of the population has remained above 2% over recent decades, resulting in the continent’s population doubling from fewer than 700 million in 1993 to about 1.4 billion at the end of 2023. While the growth rate has been declining slightly in recent years, the population continues to increase. The continent is forecast to reach nearly 2.5 billion inhabitants by 2050 with rapid population growth, high fertility rates, low median age, increasing life expectancy, large households, and widespread poverty being the main features of Africa's current demographics.

While Africa has the potential to realize a significant demographic dividend, the continent needs to find ways to reap those benefits and fulfil its potential. Major investment in infrastructure, healthcare and education, as well as improved governance, are likely to be key to unlock the continent’s potential.

There remains plenty to do with respect to the former and the latter. According to the Human Sciences Research Council, political stability across the continent overall has not improved, and it declined slightly in the five years between 2016 and 2021, although there has been wide divergence across individual countries. Apart from better governance, significant investment is also needed in Africa’s physical and human capital, which requires stable, reliable and low cost funding in the decades ahead.

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