In 2024, open interest in futures tracking the iBoxx iShares $ High Yield Corporate Bond Index and iBoxx iShares $ Investment Grade Corporate Bond Index rose considerably. Open interest in futures referencing the iBoxx $ Liquid Emerging Markets Sovereigns & Sub-Sovereigns Index also increased following its June 17, 2024, launch.

For the iBoxx iShares $ High Yield Corporate Bond Index, 2024 open interest expanded by 245% to USD 414.9 million, while the iBoxx iShares $ Investment Grade Corporate Bond Index realized growth of 238% to USD 267.4 million in 2024. This occurred alongside trading volumes of USD 12.4 billion and USD 10.1 billion, respectively, for futures tied to the iBoxx iShares $ High Yield Corporate Bond Index and iBoxx iShares $ Investment Grade Corporate Bond Index throughout the year.

Futures tracking the iBoxx $ Liquid Emerging Markets Sovereigns & Sub-Sovereigns Index have traded USD 466.3 million in notional value since their June 17, 2024, launch. Average daily open interest initially rose from USD 3.5 million in July to a peak of USD 12.8 million in September, moderated to USD 9.8 million in October and USD 10.3 million in November, and ended the year at USD 5.9 million in December.

The growth in iBoxx-linked futures open interest highlights the uptake of these indices within the tradable credit ecosystem, while the launch of futures tracking the iBoxx $ Liquid Emerging Markets Sovereigns & Sub-Sovereigns Index indicates demand for additional measures and trading tools across credit market segments. As index-based solutions evolve, these developments underscore an ongoing shift toward broader, more flexible mechanisms for managing and accessing credit exposures.

For more information, please see 2024 Fixed Income Review: Elevated Yields and Increase in Index-Linked Futures Trading.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

It is clear that the rapid rise of the 10-year U.S. Treasury yield could have significant implications for active bond manager performance, as well as bond market volatility dynamics. But how might this affect the equity market? Another important role of U.S. Treasury yields is to act as a risk-free rate to compare to the market return, the excess return of which is known as the equity risk premium.

Coupled with rising yields and continuous record highs for the stock market, Exhibit 1 shows that the S&P 500^® equity risk premium, measured here as the difference between the S&P 500 trailing 12-month earnings yield versus the 10-year U.S. Treasury yield, has plummeted over the past year, most recently entering negative territory. The last time the equity risk premium was below zero was following the burst of the Tech bubble during the early 2000s.

While the equity risk premium may indicate that equities seem relatively expensive compared to bonds, we do caveat that as of Jan. 21, 2025, Q4 2024 S&P 500 earnings season has started off on a solid note, particularly among the big banks, and if earnings growth continues, that might help to support current valuations.

We can also analyze equities and bonds from an income lens by comparing the market's dividend yield to 10-year U.S. Treasury yields. Exhibit 2 illustrates that the yield on the 10-year U.S. Treasury of 4.6% has significantly outpaced the S&P 500 trailing 12-month dividend yield, which has declined over the past couple of decades to 1.3% as of Jan. 17, 2025.

Bonds may seem relatively better positioned from a valuation and income vantage point, but their diversification potential is also interesting to examine. We observe in Exhibit 3 that correlations between equities and bonds, as measured by The 500™ and S&P U.S. Treasury Bond Current 10-Year Index, have recently turned negative. After witnessing positive correlations for most of 2024, this reversal, if sustained, might be indicative of a tailwind for enhanced risk-adjusted performance for combinations of both asset classes.

As we enter a new presidential regime, filled with many uncertain variables, we may not know the future trajectory of bonds or equities, but understanding their historical value, income and diversification characteristics could aid investors to adapt accordingly.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Since its launch in July 2022 to year-end 2024, the S&P 500^® Equal Weight ESG Index achieved a cumulative outperformance of 0.86% compared to its benchmark, the S&P 500 Equal Weight Index. Gaining insight into the factors behind this outperformance highlights important aspects of environmental, social and governance (ESG) attributes that function differently from those in market-cap indices like the S&P 500 ESG Index.

To investigate the ESG attributes contributing to the S&P 500 Equal Weight ESG Index's performance, we created hypothetical ESG quintile compositions by count and reconstituted them annually. This was done by ranking the S&P 500 Equal Weight Index's constituents based on their ESG scores and assigning them to one of the five compositions, from highest to lowest ESG score, akin to previous assessments¹ conducted on the S&P 500 ESG Index. The hypothetical equal-weighted performance of these compositions was then calculated and used to create a Brinson-like ESG attribution analysis,² teasing out the importance of ESG score exposures in the performance of the S&P 500 Equal Weight ESG Index.

Exhibit 1 illustrates the results of this analysis, measuring the contribution of ESG quintile weighting and stock selection effects to the S&P 500 Equal Weight ESG Index's excess return relative to the S&P 500 Equal Weight Index since its launch.³ To emphasize the relative impact of ESG quintile weighting and stock selection effects, the exhibit shows the proportion of the total impact, with their absolute values summing to 100% and the actual return impact shown in the labels.

Our findings reveal that the S&P 500 Equal Weight ESG Index's performance was predominantly driven by stock selection effects rather than ESG quintile weighting effects. Specifically, stock selection contributed 2.65% to the index's excess return, while ESG quintile weighting had a negative impact of 1.79%. This resulted in a total cumulative excess return of 0.86%. Of the five ESG quintiles, the ESG quintile weighting effect exceeded the stock selection effect in just one: Quintile 1.

This conclusion contrasts with the performance drivers observed in the S&P 500 ESG Index during the same period, as illustrated in Exhibit 2. The S&P 500 ESG Index achieved a cumulative excess return of 0.91% against the S&P 500, with more than 60% of this excess return driven by ESG quintile weighting effects. ⁴

The varied performance drivers highlight the significant impact that index construction methodologies can have on performance. The S&P 500 Equal Weight ESG Index⁵ can benefit from an approach that emphasizes the selection of companies with higher ESG scores across market capitalizations. This could enable it to tap into the value generated by smaller firms, which can be overlooked in cap-weighted indices.

As the growing emphasis on sustainable investing continues to shape market participants' preferences and the drivers of relative performance in the S&P 500 Equal Weight Index⁶ continue to attract attention, these findings could serve as a crucial reference for market participants looking into this index's ESG variant. For those interested in exploring more about S&P DJI's sustainability-focused indices, additional information is available in the Sustainability Index Dashboard.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

¹ For a thorough description of the hypothetical ESG quintile compositions and the drivers behind the excess return in the S&P 500 ESG Index, see Beyhan, Maya, "Charting New Frontiers," S&P Dow Jones Indices LLC, Sept. 06, 2024.

² For more information on this widely used performance attribution model, see Brinson, Gary P., L. Randolph Hood and Gilbert L. Beebower, "Determinants of Portfolio Performance," Financial Analysts Journal, July-August, 1986.

³ Analysis carried out using Portfolio Analytics on S&P Capital IQ Pro.

⁴ Analysis carried out using Portfolio Analytics on S&P Capital IQ Pro.

⁵ See the S&P Equal Weight ESG Indices Methodology.

⁶ For a thorough overview of the potential sources and drivers of relative performance in the S&P 500 Equal Weight Index, see Ganti, Anu R., Tim Edwards and Hamish Preston, "Worth the Weight," S&P Dow Jones Indices LLC, July 23, 2024.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The S&P U.S. Style Indices underwent their annual rebalancing in December 2024, leading to significant changes in sector exposures. Particularly, the S&P 500 style reclassification led to above-average turnover, as shown in Exhibit 1. While the S&P 500 Growth's turnover was not unusual, the S&P 500 Value's turnover was relatively high compared to the historical average of 23%.

The S&P U.S. Style Indices' methodology aims to divide the market capitalization of the underlying index roughly equally into growth and value indices. Style scores are calculated for each company based on three factors to measure growth and value, as listed in Exhibit 2. The most growth-oriented companies are placed in the growth basket until it represents 33% of the underlying index's market cap. The same applies to the value basket. The remaining 34% form the blended basket, which has similar growth and value traits.

Notably, three of the five largest S&P 500 Growth companies pre-rebalancing—Apple, Microsoft and Amazon (representing 31.3% of the S&P 500 Growth's weight)—moved to the blended basket. These companies migrated due to a decline in their Growth Score: Apple ranked lower in sales growth and earnings growth relative to the underlying index (the broader basket), while Amazon and Microsoft experienced declines in earnings growth and sales growth relative to the growth basket. Only Microsoft ranked lower in momentum relative to the broader basket.

At the sector level, Exhibits 4 and 5 show that the Information Technology and Financials sectors experienced the most significant changes, followed to a lesser extent by Industrials and Consumer Discretionary. For the S&P 500 Growth, Information Technology decreased from 49.7% to 39.9%, while Financials increased from 5.2% to 11.9%. Historically, this index has been Information Technology-heavy, but its Information Technology weight prior to the latest rebalance reached levels not seen in the past 15 years. The Financials weight almost doubled compared to the historical average of 6%.

In contrast, the S&P 500 Value saw its Information Technology weight roughly triple from 7.9% to 24.8%, while its Financials weight decreased from 25.2% to 15.3%. The index currently has its highest Information Technology weight following the rebalance, while its Financials weight dropped to relatively low levels compared to the historical average of 22% over the past 15 years.

Financials companies ranked high in book value to price and earnings to price, but 30% also ranked high in sales growth and momentum. This caused some companies to move from the value index to the blended basket, increasing their weight in the S&P 500 Growth by 4.1% and decreasing their weight in the S&P 500 Value by 6.0%. Additionally, companies that moved from the blended basket to the value basket resulted in a 2.6% weight increase in the S&P 500 Growth and a corresponding decrease in the S&P 500 Value.

The 2024 S&P U.S. Style Indices' annual rebalancing led to significant sector shifts, particularly in the Information Technology and Financials sectors of the S&P 500 Growth and S&P 500 Value. These adjustments highlight the dynamic nature of the style indices and how market conditions can affect their composition, ensuring the indices accurately reflect the evolving market landscape.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Once again, gold has taken the crown as the best-performing asset in the 21^st century. From the turn of the century to year-end 2024, the S&P 500^® recorded an annualized return of 7.7%, while the S&P GSCI Gold recorded 8.5% annually. While besting stocks for a quarter century, gold is still considered a safe-haven asset, especially during periods of economic uncertainty. However, 2024 highlighted how gold can also perform well during bull markets. The S&P GSCI Gold and S&P 500 posted supersized returns for the year, topping 26.6% and 25%, respectively.

In this post, we look at how the S&P GSCI Gold performed during up and down markets to better understand how it sustained long-term outperformance this century, while also maintaining its safe-haven reputation. Lastly, we expose how gold's lack of income generation could be the chink in its (golden) armor. However, deploying popular index-based strategies, we discuss the possibility of generating income through the gold derivatives market.

Gold in an Up Market

In a thriving economy, gold may serve as a hedge against inflation and currency devaluation. For instance, during the 2000s, as the S&P 500 experienced substantial gains, gold prices also steadily increased, driven by rising demand from emerging markets and geopolitical tensions. Following the dot-com crash, equity markets rebounded, with the S&P 500 increasing 82% from 2002, trending upward until the next downturn in 2007. During that same time, the S&P GSCI Gold outperformed stocks, increasing 132%. Gold rose 30% between 2010 and 2020 but did not keep pace with the equity market after the Global Financial Crisis, but there have been more recent examples of gold outperformance since. Like the dot-com era, technology stocks have recently helped push the S&P 500 to all-time highs. Gold not only kept pace in 2024, it outperformed the market by 160 bps.

Gold in a Down Market

Conversely, in a downturn, such as the dot-com bubble burst in the early 2000s, gold has often shone as a refuge. During this period, the S&P 500 plummeted, while the S&P GSCI Gold surged as investors flocked to its perceived safety. From 1999-2002, the S&P 500 fell by 38%, but the S&P GSCI Gold rose 21%, demonstrating gold's effectiveness as a protective asset. During the Global Financial Crisis, the S&P 500 fell 34% during 2007-2008, while the S&P GSCI Gold rose 34%, outperforming stocks by 6,800 bps of excess return during that period. In the past six calendar years when the S&P 500 produced a negative return, S&P GSCI Gold outperformed by an average of 20.8%.

Historically, gold has tended to retain value during economic downturns, providing a cushion against stock market volatility; however, it has also performed well during inflationary periods, preserving purchasing power. Adding gold to a multi-asset strategy may reduce overall risk and volatility, owing to its low correlation with other asset classes (see Exhibit 3). It has also demonstrated relative out-performance when the Fed maintains a restrictive monetary stance (see Exhibit 4).

One of the drawbacks to the S&P GSCI Gold is the lack of income generation. After all, gold is an "unproductive" asset that produces no income and creates zero shareholder value. However, employing a covered call strategy like the S&P GSCI Gold Covered Call has the potential to create a synthetic income stream, and the index has shown positive excess return over time. The S&P GSCI Gold Covered Call had excess return compared to the S&P GSCI Gold over the period from 2004 to 2024.

Looking ahead, factors such as global economic uncertainty, inflationary pressures and geopolitical tensions may drive demand for gold. Central banks around the world have pursued policies to "de-dollarize" and have increased gold holdings as part of their reserves, supporting its price. Gold's role as a potential diversifier and hedge against economic instability could make it an important component of a well-rounded strategy.

The posts on this blog are opinions, not advice. Please read our Disclaimers.