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TalkingPoints: The Performance and Sector Diversification of the S&P BSE SENSEX 50

The S&P South Africa 50: Bringing Efficiency and Diversification to the South African Market

The S&P/ASX 200 ESG Index: Defining the Sustainable Core in Australia

Comparing Iconic Indices: The S&P 500® and DJIA®

Aligning Income with ESG: The S&P ESG Dividend Aristocrats®

TalkingPoints: The Performance and Sector Diversification of the S&P BSE SENSEX 50

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Ved Malla

Associate Director, Client Coverage

Dig deeper into how the index tracking the 50 largest and most liquid stocks in India seeks to deliver diversification by design.

1. Passive investment continues to gain traction in India. Could you tell us more about the themes and asset classes that have received attention in recent years, and how index innovations are contributing to that growth?

Ved: There has been a surge in growth of ETFs in recent years in India, mainly due to investments from the Employees’ Provident Fund Organisation flowing into ETFs. The past year has also witnessed a large increase in passive schemes being launched by mutual funds — about 30 new schemes were launched in the passive space last year in India, and many more have been filed for approval with the regulator. In the past financial year, the AUM of passive funds have increased by 90% to over 3 lakh crores. There has also been an increase in the interest in products on global indices. Some asset managers are now exploring this space eagerly for global diversification and product differentiation. The themes that are gaining interest in India are ESG, factors, thematics, and global index strategies.

2. How was the S&P BSE SENSEX 50 designed and why might the index matter to market participants in general?

Ved: The S&P BSE SENSEX 50 is designed to measure the performance of the top 50 largest and most liquid companies in India. The index constituents are weighted based on the float-adjusted market cap and must have a minimum annualized trading value of INR 10 billion. The S&P BSE SENSEX 50 is also a highly diversified and liquid index. The returns of the index have been promising over the past 10 years; its 10-year absolute return was 230%. The annualized returns for the 3-, 5-, and 10-year periods have also been promising, at about 15%, 16%, and 13%, respectively.

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The S&P South Africa 50: Bringing Efficiency and Diversification to the South African Market

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Michael Orzano

Senior Director, Global Equity Indices

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John Welling

Director, Global Equity Indices

INTRODUCTION

The S&P South Africa 50 is designed to represent the South African equity market by selecting 50 of the largest companies listed on the Johannesburg Stock Exchange, including both South African and foreign-domiciled firms.  To reduce concentration risk, no company can account for more than 10% of the index weight at each rebalance.

In comparison with the often-used FTSE/JSE Top 40, the S&P South Africa 50 provides broader coverage and greater diversification, which contribute to its historically lower volatility and higher risk-adjusted returns.

EFFECTIVE CORE REPRESENTATION

Accessing the target market through a limited number of stocks is a hallmark of efficient investable indices.  The S&P South Africa 50 addresses the need for an efficient index for product tracking that remains representative of the characteristics of the broad market S&P South Africa Composite.

Exhibit 1 illustrates the historical returns of the S&P South Africa 50 against the backdrop of S&P South Africa Composite and the FTSE/JSE indices, which attempt to reflect a similar target universe.  The S&P South Africa 50 effectively captured the return profile of the broader market.

The S&P South Africa 50: Bringing Efficiency and Diversification to the South African Market Exhibit Chart 1

TIGHT TRACKING ERROR DEMONSTRATES CLOSE REPRESENTATION

The tight tracking of the indices and comparable history illustrate the ability of the S&P South Africa 50 to efficiently replicate the return profile of the broader South African equity market.  Since its inception,[1] the S&P South Africa 50 has delivered a relatively low tracking error of 1.9% per year against the broad market FTSE/JSE All Share, while the FTSE/JSE Top 40 posted a somewhat higher 2.0% tracking error against the same benchmark.

The inclusion of 10 additional stocks in the S&P South Africa 50 has contributed to its ability to represent the broad market.  The index covers over 94% of the float-adjusted market cap of the FTSE/JSE All Share, while the FTSE/JSE Top 40 accounts for a lesser 88%.

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The S&P/ASX 200 ESG Index: Defining the Sustainable Core in Australia

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Daniel Perrone

Director and Head of Operations, ESG Indices

EXECUTIVE SUMMARY

  • The S&P/ASX 200 ESG Index is designed to align investment objectives with environmental, social, and governance (ESG) values.
  • It can serve as a benchmark as well as the basis for index-linked investment products. Historically, the index’s broad market exposure and industry diversification has resulted in a return profile similar to that of the S&P/ASX 200.
  • The index uses the new S&P DJI ESG Scores (see page 4) and other ESG data to select companies, targeting 75% of the market capitalization of each GICS® industry group within the S&P/ASX 200.
  • The S&P/ASX 200 ESG Index excludes tobacco, controversial weapons, and companies with low UN Global Compact (UNGC) scores. In addition, those with S&P DJI ESG Scores in the bottom 25% of companies globally within their GICS industry groups are excluded.
  • Our methodology results in an improved composite ESG score compared with the S&P/ASX 200.

INTRODUCTION

Demand has increased for indices that are aligned with individual investment objectives and personal or institutional values.  The S&P/ASX 200 ESG Index was designed with both of these needs in mind.

The S&P/ASX 200 ESG Index is broad and constructed to play a central role in an investment strategy, unlike many ESG indices that have preceded it, which were thematic or narrow in their focus.  By targeting 75% of the S&P/ASX 200’s market capitalization, industry by industry, the S&P/ASX 200 ESG Index has historically offered industry diversification and a return profile in line with Australia’s leading benchmark.

Yet the composition of this new index is meaningfully different from that of the S&P/ASX 200 and more compatible with the values of ESG investors.  Exclusions are made related to tobacco, controversial weapons, and alignment with UNGC principles.  Furthermore, companies with low ESG scores relative to their industry peers around the world are also excluded.  The result is an index suitable for investors moving ESG from the fringe of their investment structure to center stage.

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Comparing Iconic Indices: The S&P 500® and DJIA®

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Garrett Glawe

Managing Director, Head of U.S. Equity Indices

S&P Dow Jones Indices

INTRODUCTION

The S&P 500 and Dow Jones Industrial Average® (DJIA), both of which are designed to track U.S. large-cap companies, are two of the most iconic indices in the world.  These indices have changed the way that investors measure the stock market and benchmark investment portfolios.  They also serve as the basis for some of the world’s most successful index-linked products and derivative contracts.

At the end of 2019, we estimate that there was over USD 11.2 trillion benchmarked to the S&P 500, which includes USD 4.6 trillion passively tracking the index.  In comparison, there was USD 32 billion benchmarked to the DJIA, which includes USD 28 billion in passive assets.

According to our estimates above, the S&P 500 won the battle to attract assets.  However, the DJIA offers several advantages, including its simplicity and a longer live history—it celebrated its 125th anniversary on May 26, 2021.  As discussed in past research, the trading volumes of investment products linked to the DJIA are high relative to the amount of assets tracking it.

The S&P 500 and DJIA have similar long-term risk/return profiles, and their three-year rolling correlations are high.  However, there are important differences between the two indices that investors should consider.

  • Number of constituents
  • Size of the component companies
  • Weighting scheme
  • Sector representation
  • Fundamentals
  • Factor exposures

We will start by exploring areas in which these iconic indices are similar and then delve into the differences.

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Aligning Income with ESG: The S&P ESG Dividend Aristocrats®

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Ari Rajendra

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

INTRODUCTION

Over the past 10 years, total ETF assets tracking dividend-related strategies have increased eightfold, reaching USD 330 billion. Including mutual funds, we estimate that nearly USD 1.4 trillion of assets are tied to dividends (see Exhibit 1). This growth trajectory, which has coincided with the persistent low-rate environment since 2008, confirms that dividend strategies have remained a key part of income-seeking investor portfolios.

Environmental, social, and governance (ESG) is an area that continues to reshape the investment landscape, with an increasing number of asset owners, asset managers, and service providers committed to responsible investing, based on data from the United Nations Principles for Responsible Investment (UN PRI). As of year-end 2020, the UN PRI signatories had at least USD 100 trillion in assets under management, a multi-fold increase in signatories and associated assets from 10 years prior.

A pioneer of dividend indexing, S&P Dow Jones Indices (S&P DJI) has continued to create, innovate, and maintain some of the most recognized dividend strategies in the indexing space, including the S&P Dividend Aristocrats Indices. This series of dividend indices targets companies that have had consistent dividend growth over time.  A measure of financial sustainability, this strategy aims to capture companies that have successful business operations and disciplined financial management.

In this next chapter, the S&P Dividend Aristocrats Series expands its scope beyond financial sustainability to include ESG considerations. Five indices have been launched as part of the newly created S&P ESG Dividend Aristocrats Series, offering access to multiple geographical regions including the U.S., global, and Europe (see Exhibit 2). These indices seek to track dividend growth stocks that simultaneously meet minimum ESG standards. In this paper, we explore S&P DJI’s innovative approach to incorporating ESG into the S&P Dividend Aristocrats Series.

Broadly, we see the following meaningful implications for both ESG and dividend investors.

  • Low tracking error and comparable dividend yield: Compared to the S&P Dividend Aristocrats Indices, the equivalent ESG versions were found to have a relatively low tracking error to non-ESG counterparts and, on average, a minor reduction in dividend yield. Despite the additional ESG-related screens, these newly launched indices retained the key characteristics of dividend growth strategies.
  • Additional layer of sustainability: Dividend growth, which underpins the S&P Dividend Aristocrats investment philosophy, is considered a well-established approach to investing in dividends. Augmenting ESG criteria serves to further ensure selection of dividend payers with sustainable and ethical business practices, a combination that could reinforce the principles of sustainable dividend investing.
  • Enhancing diversification of ESG: ESG mandates are now presented with a range of new dividend indices for selection. With multiple geographical versions available (see Exhibit 2), ESG-focused investors have an opportunity to diversify from previously available ESG strategies and climate-related investments.

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