The Market Measure: January 2025

Tracking the Companies Feeding the World with Indices

Measuring the Global Timber and Forestry Opportunity Set

A Balanced Approach: Inside the S&P 500 Equal Weight Index

Direct Indexing: Launch of MyIndex™ with S&P DJI and Brooklyn Investment Group

Index TV - Jan 16, 2025

The Market Measure: January 2025

Length 4:32

Length 4:32

Meet The Market Measure - a new video series providing fresh perspectives on markets through the lens of indices. Each month, get access to insights across geographies, asset classes and investment strategies.

To make sure you never miss an episode, sign up for content alerts.

The first installment explores the dynamics that drove performance trends around the world in 2024 as well as the potential implications of all-time highs for market participants.

[TRANSCRIPT]

Benedek Vörös:

At S&P Dow Jones Indices, we measure the markets. Hello, I'm Ben Vörös, and this is The Market Measure.

Let's start by reviewing how 2024 unfolded in global markets. In the U.S. and worldwide, most equity indices had a strong year. The Dow rose 15%, the S&P 500 25%, while mid and small caps lagged, up 14% and 9%. This chart shows index performances in U.S. dollars, the strengthening of which was a major factor in driving performances in multiple regions. China and Canada were up double digits, 16% and 11%. The main laggards were Europe, where the S&P Europe 350 gained just 3%, and Latin America, which dropped over 20%. Most fixed income indices gained in 2024. However, long bonds struggled, including in the U.S., where the S&P U.S. Treasury Bond Current 10-Year Index fell 2%, its third drop in four years. Commodities ended higher, with the broad S&P GSCI Index up 9%, while the S&P GSCI Gold rose 27%.

The S&P 500 hit two milestones in 2024. After reaching 5,000 for the first time in February, it closed above 6,000 on Veterans Day before easing to just below 5,900 by year-end. The U.S. blue-chip benchmark also marked 57 all-time highs in 2024, shown with orange dots on this chart. This is the fifth most in a year since inception. Historically, all-time highs have not been a good time to sell. As the next chart shows, since 1957, after a new record, the S&P 500 hit another one the next day 55% of the time, within a month, 92%, and 99% in a year or less. But sometimes in some markets, the wait is much longer. Investors in Japanese equities, for example, waited over 35 years for the S&P Japan BMI to hit a new record in local terms. The Japanese benchmark also suffered a 76% drop from its high in 1989 to its low in March 2009.

The S&P Japan BMI finally made a new all-time high on July 11th of last year. However, after the new record on August 2nd, the Bank of Japan surprised traders with unexpected monetary tightening as the rest of the world, including the U.S., began easing. The result was chaos in markets worldwide, with Japan at the center. The Japanese yen had vast swings, and so did the S&P Japan BMI, which had its worst one-day loss ever on August 6th, plummeting over 12%. The Bank of Japan reversed course the next day, and the index had its third best day, rising 10%.

While U.S. equity markets had less volatility, there was still plenty of big moves up and down. At the industry level, there was a more-than-100% difference between the best and worst S&P Composite 1500 industries. Top and bottom, Independent Power and Renewables soared 89%, while Personal Products dropped 17%. This chart shows the performance of the S&P Composite 1500 industries with their weights. The width of segments represents each industry's weight, and they are colored by 2024 performances. Note the wider segments, industries with larger weights, tend to be blue, while yellow segments are narrow. In other words, industries with larger weights did better, smaller industries tended to do worse.

This trend of larger segments doing better was also seen across our U.S. equity indices. The S&P 500 Top 10 Index, representing the 10 largest constituents of the S&P 500, soared 41%, while the S&P 500 Equal Weight was up just 13%, 1% short of the S&P MidCap 400. Small caps lagged even more, with the S&P SmallCap 600 up 9%.

There was also an over 100% spread between the best and worst global stock markets in 2024. Kenya came on top, up 90%, while Brazil was at the bottom, down 28%. Among developed markets, Israel led with 33%. Asia's two giants, China and India, were closely watched last year. The S&P India BMI soared 26% in the first three quarters, and as Chinese equities fell, India's market cap nearly overtook China, which would have made India the largest in the S&P Emerging BMI. After stimulus measures by China in September, fortunes reversed, and their weights in the S&P Emerging BMI diverged again.

With such differences in performances, it will be interesting to see how active funds fared last year. The latest stats are from mid-2024, and they show that, except for South Africa, most domestic active equity funds underperformed their regional benchmarks over the five years. Look out for our full-year SPIVA Scorecards coming soon and covering nine regions to see how active funds did in 2024.

Index TV - Jan 14, 2025

Tracking the Companies Feeding the World with Indices

Length 1:33

Length 1:33

How can an index-based approach help market participants to measure the evolution of global food production? Learn more about the S&P Commodity Producers Agribusiness Index and how it tracks the companies that help feed the world’s growing population.

[TRANSCRIPT]

Tracking the Companies Feeding the World with Indices

The World Health Organization estimates that almost a third of the world’s population lacks regular access to adequate nutrition.

As the world’s population continues to grow, meeting this need and increasing access to safer, more sustainable nutrition will become an even more urgent priority.

So how can market participants track companies that help feed the world?

The S&P Commodity Producers Agribusiness Index identifies companies around the world involved in every step of the food supply chain.

How does the index work?

Using revenue and industry classification data, the index identifies companies around the world involved in agriculture business activities.

This includes companies growing crops, raising livestock, processing and packaging food, manufacturing tractors and fertilizers, and distributing food to consumers.

The index universe also includes companies that research and develop products that help combat pests and blights that endanger the world’s food supply.

Each company is assigned an exposure score based on how much of its business is devoted to agriculture-related activities.

A modified market-cap weighting formula then determines each company’s size within the index.

The weighting is a product of a company’s market cap and its exposure score, so a higher exposure score means a larger relative weighting in the index.

Companies are also screened based on fair labor practices, good governance and sustainability criteria.

To learn more about the S&P Commodity Producers Agribusiness Index and how it tracks companies that help feed the world’s growing population, visit spglobal.com/spdji.

Index TV - Jan 03, 2025

Measuring the Global Timber and Forestry Opportunity Set

Length 1:45

Length 1:45

How does the S&P Global Timber & Forestry Index work? Examine a benchmark tracking companies that own, manage, harvest and process these crucial natural resources, while also incorporating governance and sustainability screens.

[TRANSCRIPT]

Measuring the Global Timber and Forestry Opportunity Set

Companies that create wood- or paper-based products, provide forest-related services or own timberland are key components of the global supply chain.

These companies also have a tremendous impact on global sustainability.

Wood is a crucial resource that is used in place of plastic and other non-renewable materials.

Just as importantly, woodlands provide recreation areas and wildlife habitats, and they help trap carbon dioxide, a key driver of climate change.

So how can market participants track companies that own and manage these vital natural resources?

The S&P Global Timber & Forestry Index identifies companies around the world involved in timber-related businesses.

This includes firms that own and manage timberlands, as well as those that produce construction materials and household products that consumers rely on every day.

So, how does the S&P Global Timber & Forestry Index work?

Using revenue and industry classification data, the index seeks to identify up to 100 companies listed in developed markets across four main industry groups:

Timber processing
Paper products
Wood products
Timber real estate investment trusts (REITs)

The index universe includes companies that own and manage timberland, including logging forests, seedling nurseries and recreation areas for hiking, hunting and even beekeeping.

The index also includes manufacturers that produce products, such as cardboard boxes, writing paper, lumber and other critical materials.

Each company is assigned a score based on how much of its business is devoted to timber-related activities. A higher score means a larger relative weighting in the index, although market capitalization is also a determinant.

Constituents are also screened and scored based on fair labor practices, good governance and sustainability criteria.

To learn more about the S&P Global Timber & Forestry Index and how it tracks companies that own, manage, harvest and process these crucial natural resources, visit spglobal.com/spdji.

Index TV - Dec 17, 2024

A Balanced Approach: Inside the S&P 500 Equal Weight Index

Length 07:32

Length 07:32

How can an equal weight approach to U.S. equities help to address concerns around mega-cap concentration? S&P DJI’s Anu Ganti and CME Group’s Joe Hickey explore the S&P 500 Equal Weight Index’s historical performance trends and its potential applications for market participants seeking enhanced diversification.

[TRANSCRIPT]

Michelle Yu:

In today's momentum-driven U.S. equity market, one of the most talked-about themes is the relative dominance of a few well-known mega-cap stocks. Hi everyone, I'm Michelle Yu, and welcome to Asset TV. For more on this topic, I want to welcome in Anu Ganti, Head of U.S. Index Investment Strategy at S&P Dow Jones Indices, and Joe Hickey, Executive Director, Equity Products at CME Group, to discuss equal weight index approaches and the growing ecosystem of exchange-traded vehicles linked to these innovative benchmarks. S&P DJI recently published a paper called Worth the Weight that takes a deep dive into the S&P 500 Equal Weight Index, or EWI for short. And we're going to start with Anu on all this. Anu, what were some of the key findings of the paper? Welcome to the program.

Anu Ganti:

Yes, so you've called out two of the big trends, which are the dominance of mega-cap companies that we've seen, as well as increased momentum. And equal weight strategies may be in focus because diversification can be especially important during periods of elevated concentration like the present. We've seen that U.S. equity market concentration is at historically high levels over the past half century. We've also seen single-stock price trends having unusual signs of extension that increased momentum. And if you look at history, historically, after peaks in concentration, the S&P 500 EWI has tended to outperform. Also, after peaks in momentum, historically, we've seen that the S&P 500 EWI has tended to outperform. So you see that mean reversion taking place. Now let's focus on index design looking at the S&P 500 EWI. Each constituent, so it's the same 500 companies within the S&P 500, is allocated an equal weight, so 0.2% of the index total. Now there's two important consequences of that. One is increased exposure to smaller size. For example, the S&P 500 EWI has roughly 80% of its weight as of the end of the second quarter in the bottom 400 companies. So that's interesting, getting that smaller size exposure. While if you look at the cap-weighted S&P 500, it only had roughly 27% weight in the bottom 400 companies. So that's one. The other effect is from the quarterly rebalance of selling the relative winners and buying the relative losers gives you this anti-momentum bias. So, if you put that together, the smaller size exposure as well as the anti-momentum bias, over the long term, we've seen that the S&P 500 EWI has outperformed over more than 20 years of live history and over the hypothetical back-tested history going back to 1970.

Michelle Yu:

Now, I want to shift the attention now and break down why an equal weight index is considered an attractive option for CME and also what benefits could we see in using this approach compared to other indexing methods? And I think Joe has some answers for us. Hello.

Joe Hickey:

Hello, certainly. Thank you, Michelle. Client conversations around concentration risk facing equity investors led us to launch the E-mini S&P 500 Equal Weight Future in February of this year. It was a slow start, but the theme of less concentration and more diversification has resonated with investors. In the last three months, daily traded volume has grown to over 900 contracts a day, or USD 130 million notional. We've seen product use across all of our client types, from market makers, banks, hedge funds and asset managers. Adoption has led to a single-day volume trading record of nearly 14,000 contracts last month, and open interest stands at over USD 2.2 billion currently. Spread trading is an important strategy for futures traders, as we designed the E-mini S&P 500 Equal Weight Future (EWF) to trade at a 2-to-1 notional ratio with the E-mini S&P 500 Future (ES). Given the ease of spread trading at CME, we see many global participants trading spreads against other equity products as well. This highlights the CME value proposition of capital efficiency, where traders are able to receive margin offsets in their diversified portfolio of long and short positions.

Michelle Yu:

Now I think something that viewers want to know is, are there other financial products based on the S&P 500 EWI? And also, how do the sector allocations compare with the S&P 500? Anu.

Anu Ganti:

Yes, so in addition to derivatives that Joe talked about, there are also ETFs, index funds based on the S&P 500 EWI across markets and across regions. Now coming to your question on sectors. It is very interesting because the S&P 500 EWI can have different sector allocations versus the S&P 500. For example, as of the end of the second quarter, the S&P 500 EWI had a greater exposure to Industrials. It also had less exposure to Information Technology. But that's not what drove the long-term outperformance. Our research found that it was actually intra-sector weighting, or weighting within sectors like Financials, Industrials and Health Care, that really drove the long-term outperformance. And a final note is, we're talking about the outperformance of mega caps over the past year. So we've seen that the S&P 500 EWI unsurprisingly has underperformed. But Q3 was interesting because we saw the reversal with the recovery of smaller caps and the S&P 500 EWI has outperformed since then. So that is something that we're closely watching.

Michelle Yu:

And Joe, what are some major trends that you're seeing in equity index products?

Joe Hickey:

Execution precision remains a top priority to clients. One trading functionality heavily used is BTIC, or basis trade at index close. This tool enables market participants the ability to execute at the official close of the underlying index plus a basis. This is useful for institutional investors because it allows traders access to one of the most liquid points of the day, the cash close, when net asset values are calculated. Year-to-date, BTIC volumes are up over 20% across all equity index products, with more than USD 22 billion traded daily. All in all, CME equity products' ADV is up 17% versus Q3 of last year. And when we zoom in on the E-mini S&P 500 Futures (ES), we see a huge share of volume traded daily, about USD 370 billion notional. That's more than 10 times the volume of the next three top traded S&P 500 delta one instruments combined. This highlights the importance of ES as a source of price discovery to the marketplace.

Michelle Yu:

Alright, well we're going to stop on that thought. Joe, Anu, thank you both for joining me here today. To learn more about equal-weighted strategies and why they may be relevant in today's concentrated market, and to explore the paper about the S&P 500 Equal Weight Index, Worth the Weight, and other S&P DJI research, go to www.spdji.com. I'm Michelle Yu. Thanks so much for watching Asset TV.

Index TV - Dec 10, 2024

Direct Indexing: Launch of MyIndex™ with S&P DJI and Brooklyn Investment Group

Length 13:09

Length 13:09

What’s fueling the growing interest in direct indexing? S&P DJI’s Robby Ross and Brandon Hass sit down with Erkko Etula from Brooklyn Investment Group to explore how direct indexing solutions can enable investment managers to customize leading indices like the S&P 500 to meet specific objectives.

[TRANSCRIPT]

Robert Ross:

Hi and welcome. I'm Robby Ross, Chief Commercial Officer for S&P Dow Jones Indices. We're excited to announce the launch of MyIndex, a customizable version of our indices in partnership with Brooklyn Investment Group. Joining us today is Erkko Etula, CEO and Co-Founder of Brooklyn Investment Group, and Brandon Hass, Head of Direct Indexing and Model Portfolios at S&P Dow Jones Indices. Welcome both of you.

Erkko Etula:

Thank you.

Brandon Hass:

Thank you.

Robert Ross:

Let's get started. Brandon, to start, can you explain what is MyIndex and how does it work?

Brandon Hass:

Yeah, absolutely would love to. Thanks again for having us here. So what MyIndex is, I think you kind of hit the nail on the head. It's a custom solution based on our index files that provide for a universe to create personalized, customized index investment solutions at scale. How it works is we have an agreement with Brooklyn Investment Group in a collaboration where we actually plug in hundreds of thousands of index files every single day that they can then use to customize investment solutions based on unique, discrete needs of particular clients, right on a financial advisor's workstation. So we really feel like this is the next evolution in delivering our index files for creation of custom portfolio solutions at mass scale.

Robert Ross:

That's great. And Erkko, over to you. Can you talk to us a bit about Brooklyn Investment Group and what makes it unique?

Erkko Etula:

So Brooklyn Investment Group is a multi-asset direct indexing platform for financial advisors. So let's unpack that a little bit. So direct indexing, as you all know, is a way to invest in the underlying securities like stocks and bonds directly while incorporating personalization and tax management. So you don't need to invest in an ETF to invest in the underlying stock. That's an example. Now, multi-asset means that we cover both equities as well as fixed income. Now, so the advisor can really tailor for each client a portfolio that spans both stocks and bonds, so really thinking about a whole portfolio solution.

Robert Ross:

Great. Thank you. And Brandon back to you. How does this collaboration enhance access to S&P Dow Jones Indices, and what benefit does it provide to the next generation of investors?

Brandon Hass:

So from an access point perspective, as I mentioned before, we're providing kind of a more linear access to our index files via Brooklyn Investment Group's back end. The advisor now has the ability to come in and implement the client-specific information and then overlay that on to our index files, and through Brooklyn's really industry-leading technology services, can create a custom investment solution that ultimately is tied back to the index file, and the index file continues to inform all portfolio decisions on a go-forward basis based on things like rebalance, reconstitution, corporate actions, et cetera. And as we see direct indexing continue to evolve, it's not a new thing, but it is evolving rapidly based on technology solutions and kind of a convergence of other factors. We feel that this facilitates an experience that brings scale and customization to the market, ultimately tied back to our intellectual property.

Robert Ross:

That's great. Thank you. And Erkko, how does Brooklyn's platform compare to perhaps options that people are more familiar with such as ETFs and mutual funds in terms of customization?

Erkko Etula:

So, broadly speaking, what we provide to the advisor and the end client are three things. There's customization, there's the tax alpha and also what we call operational alpha. So the ability for the advisor to customize each portfolio while still continuing to scale their growth. And how that compares to prior investment options, let's think about your mutual funds, your ETFs. So mutual funds really gained popularity in the middle of the century. ETFs started taking market share from mutual funds in the 1990s, but both of those commingled vehicles put investors among each other in the same standardized set of exposures. Now, direct indexing enables for each investor to fully customize their own portfolio. So, take the family of S&P DJI indices, mix them together and then add their own investor restrictions or preferences. And, in addition, enables tax-loss harvesting. Now, what are tax losses used for? Well, tax losses are used to offset gains elsewhere in the portfolio to help minimize the taxable income of each investor. So that is really the reason why we think that the technology-powered managed account and direct indexing is really becoming the vehicle of choice for investors going forward. So three things, your personalization, your tax alpha, and then also the operational alpha for the advisor to continue to scale their business while providing personalization to their clients.

Robert Ross:

It's amazing how technology is able to provide that. And back to Brandon for a minute. What insights have S&P Dow Jones Indices gained from observing trends in direct indexing, and how has demand for portfolio customization evolved?

Brandon Hass:

It's a great question. There's a lot to unpack there. So as I mentioned before, direct indexing, it's been around for really decades inside of an SMA format, and that continues to exist. And what we tend to find within the marketplace today is that direct indexing is often reflected in things like large-cap core exposure or really predominantly U.S. equity exposure with a kind of a tilt and a preference towards large-cap core and these liquid instruments that exist, things that are tied to indices like the S&P 500. And within the United States, that's often a client's largest allocation or allocation sleeve when we're thinking about goals-based wealth management or multi-asset risk-based modeling. And so that trend is continuing. We tend to see that the large-cap core and the reflection of the S&P 500 as a pivotal position within the direct indexing ecosystem. Now, as direct indexing continues to kind of permeate and percolate through the industry, there's a lot of choices out there. And as I mentioned before, we as an index provider also have a philosophy of providing choice. So we're not just the S&P 500, we have again thousands, really hundreds of thousands, of indices in various iterations. We continue to innovate these iterations via these liquid ecosystems and relationships that we have with the exchanges to price accordingly and have what we call scrutinized data sets that are really packaged into independently governed and independently governed calculated indices. And so as we see this choice continue to evolve, so too is the way that the indices to which they're tied are being delivered. So we're kind of seeing this trend expand outside of the large-cap core into other sizes of the market segment as well as factor allocations, international or global equity allocations, and then things like what Brooklyn Investment Group is doing with the fixed income component of clients' sleeve. And what this does is it allows, again, investors to continue to invest and make decisions with confidence. Because at the end of the day, the data sets and the information is backed by S&P Dow Jones Indices. We are product and wrapper agnostic, and delivering those data sets to empower decision-making with confidence is ultimately the philosophy that we continue to stand by.

Robert Ross:

That's great. Thank you. And Erkko, I think last question for you. What features of Brooklyn's platform make it great for using MyIndex? Talked earlier about some of the benefits, but how do these features improve client results?

Erkko Etula:

So there are really two main benefits for the clients. And we talked about tax management. So the tax-loss harvesting and the ability to bring the after-tax return above the pre-tax return, which is huge. So we're talking about potentially percentage points of additional return say on your S&P 500 index return. And then personalization. So there's basically a continuum of personalization options for each client. So basically each client account lives in its own capsule. There's some household relationships that tie the capsules together. But within each capsule, the advisor can personalize the portfolio. So let's take a mix of S&P DJI indices to begin. You can combine those equities as well as say municipal bonds in the same account. Then the advisor goes and incorporates the client's investment preferences or restrictions. So, for example, exclusions of certain stocks. Maybe the client comes in with a concentrated position and wants to sell it down in a tax-neutral way. Maybe the client has a preference toward higher-dividend stocks. So they can actually tilt the portfolio say starting with the S&P 500 exposure and tilt it toward higher-dividend stocks. And then obviously ESG, industry, sector exclusions as well as tilts. So basically there is a continuum of preferences that can be incorporated in each client portfolio. And what is more, we also report on the performance impact of those tilts on both pre-tax and after-tax bases. So at the end, the advisor can go to the client and say, look, this is how we personalize the portfolio for you. We listened to everything that you wanted to incorporate. We accounted for your concentrated company stock that we're selling down in a tax-neutral way over time. And by the way, here is the performance impact, both on a pre-tax as well as after-tax basis versus the original benchmark and the benchmark that incorporated your preferences. So very fine performance attribution and a nice story for the advisor to tell in every client meeting.

Robert Ross:

It's an amazing technology. Brandon, last question to you. How does S&P Dow Jones Indices keep its index methodologies transparent and in-line with market needs, particularly in a collaboration like this.

Brandon Hass:

Great question. So let me talk about transparency and then I'll talk about aligning with client needs. From a transparency perspective, transparency is at our core. We provide independently calculated and governed indices, and we publish that methodology publicly in a public domain. So if you were to go online and google S&P Dow Jones, fill in the blank index, that methodology deck is right there for every person to view. So public transparency of index methodology is really at the core of our philosophy. Let's talk a little bit more about addressing client needs, also at the core of our philosophy. The concept of providing choice to the market across a multitude of market segments via our index methodology is really at the center of what we do as well. We have hundreds of thousands of indices that we calculate every single day across various market segments, regions, sizes, styles and currencies. And as the market continues to evolve, we'll bring new index solutions to market. And the way that we pump those index files and intellectual property into these various channels, which have mostly historically been ETF, structured products, and SMAs to a certain extent, now can actually facilitate an experience where they're powering the back end of a technology service that sits on an advisor's workstation or a combination thereof. We want to continue to provide that choice to the market via our intellectual property and allowing investors to make investment decisions with confidence.

Robert Ross:

Thank you very much. Thank you, Erkko, thank you, Brandon, for discussing the future of direct indexing and MyIndex. It's exciting to see how the collaboration between S&P Dow Jones Indices and Brooklyn Investment Group is creating personalized investment options. Thank you for watching. We'll keep you updated on S&P Dow Jones Indices' latest innovations. Thank you.

Brandon Hass:

Thank you.

Erkko Etula:

Thank you very much.

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