IN THIS LIST

ETFs in Insurance General Accounts – 2023

Approaches to Benchmarking Listed Infrastructure

Diversifying Israel’s Home Bias with U.S. Equities

Incorporating Environmental Considerations into Commodity Indices

Analyzing High Dividend Yield Strategies in Australia

ETFs in Insurance General Accounts – 2023

Introduction

In 2022, the amount of exchange-traded funds (ETFs) held by U.S. insurance companies in their general accounts dropped 23.5% (or USD 11.2 billion) to USD 36.6 billion.  This represents the first substantial drop in ETF assets since insurance companies started buying ETFs in 2004.  However, two factors complicate analyzing the drop in ETF assets.  The first is the unusual bear market we had in 2022, with both equity and fixed income markets showing sharp declines—the S&P 500® dropped 19.4% and the S&P U.S. Investment Grade Corporate Bond Index dropped 14.3%.  In 2022, insurers withdrew USD 4.1 billion from ETFs, so valuation declines explain approximately two-thirds of the drop in AUM.  Also in 2022, two Mega insurers decided to exit all public equites, including ETFs.  This represented USD 3.5 billion of all the withdrawals.  Excluding these two companies from the analysis, insurer ETF AUM declined by 16.5%—or in line with market results.

Even though most U.S. insurer assets are in Fixed Income, insurers typically invested in Equity ETFs.  This continued to be the case, even with the large amount of Equity ETFs sold by the two Mega companies.  Outside of these two companies, we saw flows into Equity ETFs and away from Fixed Income ETFs.

In our eighth annual study of ETF usage in U.S. insurance general accounts, we also analyzed the trading of ETFs by insurance companies.  For the second consecutive year, trade volume declined; however, the overall trend remains positive, with 2022 trade volume increasing 350% over 2015 trade volume.

Holding Analysis

Overview

As of year-end 2022, U.S. insurance companies invested USD 36.6 billion in ETFs.  This represented only a fraction of the USD 6.5 trillion in U.S. ETF AUM and the USD 7.9 trillion in invested assets of U.S. insurance companies.  Exhibit 1 shows the growth of ETFs by U.S. insurance companies over the past 18 years.

ETFs in Insurance General Accounts – 2023 : Exhibit 1

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Approaches to Benchmarking Listed Infrastructure

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

Investing in infrastructure has become popular among institutional and private investors in recent years. Investors could be attracted to the potentially long-term, low-risk and inflation-linked profile that can come with infrastructure assets, and they may find that it is an alternative asset class that could provide new sources of return and diversification of risk.

Why Consider Investing in Infrastructure?

Infrastructure assets provide essential services that are necessary for populations and economies to function, prosper and grow.  They include a variety of assets divided into five general sectors: transportation (e.g., toll roads, airports, seaports and rail); energy (e.g., gas and electricity transmission, distribution and generation); water (e.g., pipelines and treatment plants); communications (e.g., broadcast, satellite and cable); and social (e.g., hospitals, schools and prisons).  Infrastructure assets operate in an environment of limited competition as a result of natural monopolies, government regulations or concessions.  The stylized economic characteristics of this asset class include the following.

  • Relatively steady cash flows with a strong yield component: Infrastructure assets are generally long lived. Most companies have long-term regulatory contracts or concessions to operate the assets, which can provide a predictable return over time.  As a result, infrastructure assets have the potential to generate consistent, stable cash flow streams, usually with lower volatility than other traditional asset classes.
  • High barriers to entry: Due to significant economies of scale, infrastructure assets are often regulated in such a way that discourages competition. The high barriers to entry often result in a monopoly for existing owners and operators.
  • Inflation protection: Revenues from infrastructure assets are typically linked to inflation and are often supported by regulation. In certain instances, revenue increases linked to inflation are embedded in concession agreements, licenses and regulatory frameworks.  In other cases, owners of infrastructure assets are able to pass inflation on to consumers via price increases, due to the essential nature of the assets and their inelastic demand.

Consequently, the infrastructure asset class may provide investors with a degree of protection from the business and economic cycles, as well as attractive income yields and an inflation hedge.  It could be expected to offer long-term, low-risk, non-correlated, inflation-protected and acyclical returns.

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Diversifying Israel’s Home Bias with U.S. Equities

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Sherifa Issifu

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

Executive Summary

Investors in most countries exhibit a home bias, but it is particularly acute in Israel.  On average, Israeli investors allocate a higher amount to domestic equities than their developed market peers in the U.K, Europe and Canada, and thus may not be fully accessing the potential benefits of global diversification.  This paper provides ample opportunities to consider the historical benefits of international diversification, including with U.S. equity indices.

In this paper, we:

  • Compare and contrast U.S. equity indices (S&P 500®, S&P MidCap 400® and S&P SmallCap 600®) with Israeli equity indices (TA-35 Index and TA-125 Index);
  • Show that any hypothetical combination of U.S. equity indices with Israeli equity indices would have outperformed the Israeli market in isolation since December 1994;
  • Explore diversification via sector exposures and geographic revenues; and
  • Explain the primary reason for the growth of passive investing: most active managers have underperformed their benchmarks over most time periods.

Long-Term Performance of U.S. and Israeli Equities

In this paper, we are using the prevalent local equity benchmarks for Israel, which are produced by the Tel Aviv Stock Exchange (TASE).  For a large-cap comparison to the S&P 500, we will use the TA-35 Index, which is Israel’s flagship index and tracks the 35 largest companies listed on the TASE.  In instances where we are looking at the Israeli equity market more broadly, the TA-125 Index will be used. 

Exhibit 1a and Exhibit 1b highlight that the S&P 500 significantly outperformed the Israeli market, as represented either by the blue-chip TA-35 Index or the broad market TA-125 Index, by 2% annualized since Dec. 31, 1994.  The outperformance of the S&P MidCap 400 and S&P SmallCap 600 was even more impressive, with the two beating the U.S. large-cap benchmark by 2% and 1%, respectively, over the last 28 years.  The S&P 500, S&P 400® and S&P 600® all outperformed the Israel indices on a risk-adjusted basis as well. 

Diversifying Israel’s Home Bias with U.S. Equities: Exhibit 1

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Incorporating Environmental Considerations into Commodity Indices

S&P DJI and J.P. Morgan contributed equally to this paper.

Executive Summary

The focus of the paper is on the environmental footprint of commodities and the incorporation of environmental metrics into transparent, rules-based commodity indices.

In the first section, we identify and discuss the various challenges associated with investing in commodities from a sustainability standpoint.  The focus is on environmental impacts, and while we do not specifically address social and governance considerations, we acknowledge that they are important and a key area of future research.

We then present a new dataset that measures the environmental footprint of the S&P GSCI constituents. The dataset provides robust and comprehensive physical and financial impact data on GHG emissions, water consumption and land use at the commodity level, based on life cycle impact assessment factors and natural capital valuation metrics.  We then introduce the concept of commodity valuation intensity, which ascribes an economic value to environmental impacts on a per unit of commodity production or per dollar invested (or dollar per contract value).  This allows for comparison across commodities and types of environmental impacts. We begin the process of building our index frameworks by redefining new commodity “sectors” to reflect the changing dynamics of the global economy.  We divide the components into three economic sectors: energy systems, food supply and other, based on their impact on the environmental transition and potential substitutions within each category.

The paper describes two index framework approaches to adjusting the S&P GSCI to incorporate environmental data. The first is the Optimization Approach, which seeks to reduce the environmental footprint of the index while minimizing weight and sector deviations from the S&P GSCI.  The optimized constituent weights are constrained to help maintain diversification, investability and liquidity for the index. There is also an embedded transition mechanism that seeks to decarbonize the index year-on-year. The second approach (Substitution Approach) incorporates both negative and positive environmental externalities.  Specifically, we introduce the concept of the environmental displacement ratio to measure the overall impact of those commodities that have a net positive role to play in the transition.  This approach also incorporates a glidepath to changing allocations over time and considers an allocation to carbon emission allowances.

We conclude that it is possible to build commodities indices that incorporate environmental footprint data while maintaining the similar inflation sensitivity and diversification benefits as the benchmark.  In the final section of the paper, we consider the need for additional research and discussion on the topic.

Introduction

Commodities are the building blocks of the economy.  They are essential for the provision of shelter, sustenance, warmth and light.  They are real, investable assets, and they can be highly relevant to multi-asset portfolios in relation to diversification and inflation protection.

Since the beginning of 2020, commodities markets have been trading through a period of heightened volatility, grappling with multiple sources of uncertainty, including the conflict in Ukraine, the return of high inflation, tightening monetary policy, U.S. dollar strength and the economic repercussions from COVID-19, as well as a series of supply shocks across individual commodity markets.

This volatility is based on a plethora of geopolitical issues in the short term, but longer term there are additional constraints that affect supply and demand imposed by the energy transition and the incorporation of sustainability considerations.  These market dynamics present both opportunities and challenges to those involved in the broad commodity investment ecosystem.

Sustainability considerations have become a major focus for many institutional investors.  Some asset classes such as equities and fixed income have led the way, as granular information is already available to incorporate them in to a portfolio composition.  Commodities, which play a key role in current environmental impacts and in the transition to come, have paradoxically lagged this evolution.

In this context, market participants have expressed their desire for a framework to begin to incorporate sustainability considerations into their commodity portfolios.  To date, the investing community has not grappled with this issue in regard to commodities, as much as it has with other asset classes.

The commodities market currently lacks some of the tools necessary to address this demand completely. This paper seeks to outline potential solutions for incorporating environmental considerations in commodity indices and identifying some of the remaining gaps. In doing so, we hope to not only provide market participants with considerations for their own analysis, but also help the industry identify those tools needed for further progress.

Contributors:
Fiona Boal, Managing Director, Head of Commodities and Real Assets, S&P Dow Jones Indices
Stephane Audran, Managing Director - Co-Head, Global Strategic Indices, J.P. Morgan
Steven Bullock, Managing Director, Global Head of Research and Methodology, S&P Global Sustainable1
Kimberly Gallant, Executive Director – Co-Head, Investable Index Solutions, Americas Lead, Global Markets Sustainability Center, J.P. Morgan
Adam Denny, Senior Analyst, Global Research & Design, S&P Dow Jones Indices
Gwen Yu, Executive Director – Global Markets Sustainability Center, J.P. Morgan

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Analyzing High Dividend Yield Strategies in Australia

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

Introduction

Dividend indices are one of the most widely recognized factor-based strategies.  According to Morningstar, as of Sept. 30, 2022, there were 411 dividend-focused exchange-traded products (ETPs) worldwide, with over AUD 522 billion in AUM.  Dividend ETPs had inflows of over AUD 97 billion in the first three quarters of 2022.  With over AUD 3.5 billion in AUM—or 40% of the Australian factor ETP market—the dividend factor is one of the most popular in Australia.

In this paper, we will examine the Australian dividend market in depth and analyze the historical performance of the Australian high dividend yield strategy.

Australia Dividend Market

As one of the highest-yielding equity markets in the world, Australia has attracted extensive attention from market participants.  As of Dec. 31, 2022, the trailing 12-month dividend yield of the S&P/ASX 300 was 4.5%, the highest among major developed markets (see Exhibit 1).  ETF assets tracking dividend strategies in Australia have grown from AUD 571 million in 2012 to AUD 3,887 million as of Dec. 31, 2021, with an CAGR of 21% (see Exhibit 2).  In 2022, the dividend AUM fell about 8% to AUD 3,585 million.

Analyzing High Dividend Yield Strategies in Australia: Exhibit 1

Analyzing High Dividend Yield Strategies in Australia: Exhibit 2

Through the analysis of historical data, we have observed three major characteristics in the Australian dividend market:

  1. A resilient dividend pool with a stable growth rate;
  2. The financials and the materials sectors contributed the majority of dividends; and
  3. A high level of dividend yield and payout ratio.

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