IN THIS LIST

TalkingPoints: Why is the S&P 500® Relevant Globally?

FAQ: S&P/TAIFEX RMB Indices

Low Volatility: A Practitioner's Guide

Introducing the S&P U.S. Preferred Stock Low Volatility High Dividend Index

Accounting for Carbon: Sovereign Bonds

TalkingPoints: Why is the S&P 500® Relevant Globally?

The S&P 500 is a renowned benchmark for large-cap U.S.  equities and is widely referenced as the gauge of U.S. equity  performance. But what is the relevance of the U.S. market  and the S&P 500 internationally?

  1. When we talk about the U.S. market, just how big is it?

Jodie: The S&P 500 is the proxy for the U.S. market, and it represents about 80%-85% of the U.S. stock market. But from a global perspective, the U.S. is over one-half of the global stock market, as measured by the S&P Global BMI. This really matters because as the U.S. economy grows, it propels the stock markets of all other countries—and the U.S. stock market is largely driven by consumer spending. So really, the more a exports to the U.S., the more sensitive it becomes to U.S. growth. For example, a country like Korea has a high sensitivity and on average, rises nearly 9.5% for every 1% Head of U.S. Equities  of U.S. growth, whereas the UK only grows about 2.5%. So you can see the differences S&P Dow Jones Indices in impact per country.

  1. In light of the importance of the U.S. market—proxied by the S&P 500—what’s the ecosystem around the S&P 500 itself?

Tim: That’s one of the important differentiating factors of the S&P 500. In most markets, S&P 500-based products will be among the most liquid, most traded, and most invested among all the other alternatives.

Part of that is because it’s not just about the benchmark itself, rather it’s about the availability of the different aspects that are available in a tradable format. We can mention futures, options, and the VIX®—if you were to pick one macro indicator that the rest of the world watches to gauge not just the U.S. but the global economic health, it would probably be the VIX, which is based on S&P 500 options. Then we have S&P 500 sectors, and smart beta or factors, such as momentum. An ecosystem has grown around the different investment aspects, pieces, segments, and characteristics of over the many years since it was first launched in 1957. There’s a phenomenal wealth of not just data but also products that are internationally relevant.

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FAQ: S&P/TAIFEX RMB Indices

INDEX DESIGN

1. What are the S&P/TAIFEX RMB Indices? The S&P/TAIFEX RMB Index Series comprises the S&P/TAIFEX RTF RMB Index (USD) and the S&P/TAIFEX RHF RMB Index (USD).  These indices seek to track the performance of the inverse of the nearest quarterly month RTF or RHF futures contract traded on the Taiwan Futures Exchange (TAIFEX), reflecting the number of U.S. dollars per offshore Chinese renminbi (RMB) for Taiwan and Hong Kong.  For the S&P/TAIFEX RMB Indices, 1x inverse and 2x leverage versions are available and are designed to generate the inverse of and twice the daily excess return of the underlying indices. 

2. Why were the S&P/TAIFEX RMB Indices created? There has been increasing demand for RMB-denominated assets and a growing trend of internationalization of the RMB.  In collaboration with the TAIFEX, S&P Dow Jones Indices (S&P DJI) has created this index series that enables more effective management of exposure to Chinese yuan currency risk and speculation of the yuan through investment products tracking the S&P/TAIFEX RMB Indices, as well as their inverse and leverage counterparts.

3. What are the differences between the RTF and RHF futures contracts? There are two key differences in terms of contract size and final settlement prices.  The RTF and RHF have contract sizes of USD 20,000 and USD 100,000, respectively.  For the final settlement price, the RTF uses the spot USD/CNY(TW) fixing published by the Taipei Foreign Exchange Market Development Foundation, while the RHF uses the spot USD/CNY(HK) fixing of the Treasury Markets Association of Hong Kong.

INDEX CONSTRUCTION

1. How are the S&P/TAIFEX RMB Indices designed? The S&P/TAIFEX RTF RMB Index and the S&P/TAIFEX RHF RMB Index seek to measure the return from a long position in the inverse of the first quarterly month futures contract.  By using the inverse of the futures contract price, the S&P/TAIFEX RMB Indices are denominated in U.S. dollars, although the RTF and RHF futures contracts are quoted in Chinese renminbi per U.S. dollar.  In this way, the indices’ levels rise when the renminbi appreciates (reflected by the respective futures price movement) and vice versa.

2. How are the futures contracts rolled? To improve the capacity of the index, a five-day staggered rolling is implemented.  Specifically, over a five-day rolling period every quarter, starting 10 trading days and ending 6 trading days prior to the futures last trade day (including the last trade day), the index rolls to the second quarterly month contract, with 20% of the portfolio being rolled each day.  Exhibit 1 provides an example roll period, showing the mechanics of the roll period based on the last trade dates of the underlying futures contracts.

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Low Volatility: A Practitioner's Guide

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Tim Edwards

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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Craig Lazzara

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

S&P Dow Jones Indices (S&P DJI) produces a range of low volatility indices, covering various single-country and international markets.  These indices offer a perspective on the returns of lower volatility equities and provide a basis for index-linked products and benchmarks globally.  This practitioner’s guide:  

  • Explains the construction of low volatility indices;
  • Identifies the role of broader market trends, valuations, interest rates, and sector exposures in determining their performance;
  • Highlights the potential applications of low volatility strategies; and
  • Summarizes the evidence for the existence and potential persistence of the so-called “low volatility anomaly.”

Exhibit 1 illustrates an important aspect of low volatility indices: their potential to offer higher risk-adjusted returns than the market benchmark from which they were derived.

INTRODUCTION

Basic financial theory is predicated on the idea that higher-risk investments should be priced to offer commensurately higher returns.  Unfortunately for the theory, a growing body of empirical evidence—accumulated since the 1970s[1]—suggests that, across a wide range of time horizons, geographies, and market segments,[2] stocks with lower volatility have displayed higher risk-adjusted returns.

Meeting the need for low volatility benchmarks, S&P DJI’s low volatility indices track the performance of a portfolio of the least volatile stocks selected from a given benchmark universe, such as the S&P 500.  Indeed, the first-ever low volatility index was the S&P 500 Low VolatilityIndex, launched in April 2011.  Many more have been produced since.[3] 

The performance and risk/return characteristics of these indices, both over hypothetical back tests and subsequent to their launch dates, provide further confirmation that lower-risk stocks can offer superior performance characteristics.  Exhibit 1 provides a summary for a selection of low volatility indices based on various benchmarks over the last 15 years, displaying the improved risk/return ratios of each low volatility index in comparison to its corresponding parent benchmark. 

In light of the growing popularity of products (such as ETFs) offering access to low volatility strategies, a growing body of research identifying and quantifying the drivers of low volatility performance has emerged. These include the role of sectoral allocations, interest rate sensitivities, and equity valuations.  In what follows, we shall briefly summarize the salient points that emerge from this research.

More directly to practitioners’ interests, we shall also examine the portfolio applications of low volatility strategies, in either a multi-factor or multiasset context.  We conclude by addressing the question of whether or not the so-called “low volatility anomaly” of higher risk-adjusted returns might continue.  

Note that while our results extend in spirit to many similar equity strategies, our focus will be restricted to the indices produced by S&P DJI.  Accordingly, we begin with a summary of the methodology used to construct our low volatility indices, and a brief examination of the practical consequences of using historical volatility rankings to form equity portfolios.

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Introducing the S&P U.S. Preferred Stock Low Volatility High Dividend Index

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Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

S&P Dow Jones Indices

INTRODUCTION TO PREFERRED STOCKS

What Are Preferred Stocks?

Preferred stocks are hybrid securities, blending characteristics of stocks and bonds.  They sit between common stocks and bonds in a company’s capital structure, thus having a higher claim on a company’s assets and earnings than common stocks, while having a lower claim than bonds (see Exhibit 1).

Like common stocks, preferred stocks represent ownership in a company and are listed as equity in a company’s balance sheet.  However, certain characteristics differentiate preferred stocks from common stocks.  First, preferred stocks provide income to investors in the form of dividend payments, typically providing higher yields than common stocks.  Second, preferred shareholders lack voting rights, resulting in less influence on corporate policy.  While common stock shares offer investors the potential for share price and dividend increases, investors generally look to preferred stocks for their high-yielding, stable dividend payments.

Preferred stocks are issued at a fixed par value, similar to bonds, with most paying a scheduled fixed dividend.  Preferred stocks are rated by independent credit rating agencies.  The rating is generally lower than bonds since preferred stocks offer fewer guarantees and have a lower claim on assets.  While a company risks defaulting if it misses a bondcoupon payment, it can withhold a preferred dividend payment without facing default risk.[1]

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Accounting for Carbon: Sovereign Bonds

INTRODUCTION

In 2015, the Paris Agreement was signed, committing 195 signatory nation-states to limiting greenhouse gas (GHG) emissions to well below 2 degrees  Celsius above pre-industrial levels.[1]  This recognized the clear role of governments around the globe in curtailing potentially catastrophic levels of global warming, which could have widespread and systemic impacts on the global economy, capital markets, and the quality of human life.  Sovereign bonds, the issuance of debt by a country to finance its activities, is one of the largest asset classes in the world, with over USD 20 trillion of central government debt securities outstanding in 2016[2] and general government debt exceeding USD 62 trillion in 2016.[3]  As such, it is a key mode of financing for governments, is one of the largest asset allocations by pension funds, and should be a focus of examination for climate risk analysis.

Portfolio carbon footprinting as a tool to support climate reporting and risk assessment has grown in popularity over recent years, so much so that it has become incorporated into best practice reporting guidelines for investors.  These include those outlined by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), which is backed by the central banks of the G20 countries and is legislated as part of France’s Article 173 regulation.  While it is now becoming common practice for asset owners and managers to report the footprint of their listed equity holdings and corporate fixed income portfolios, sovereign bonds have remained largely unexamined from a carbon risk and reporting perspective due to lack of appropriate metrics and actionable insight.  However, climate change affects all asset classes, so investors would need to measure, understand, and manage the climate change risks embedded in their sovereign bond portfolios as well.

In this paper, Trucost outlines a number of approaches to sovereign bond evaluation and the metrics available.  Scope and breadth of emissions are key considerations, as is the denominator chosen to normalize emissions to facilitate comparison between entities of different size.  The most appropriate metric may differ depending on the question(s) that investors intend to answer.

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