Exploring S&P PACT™ Indices Weight Attribution

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Factor Strategies in Brazil: A Practitioner's Guide

Credit VIX®: A New Tool for Measuring and Managing Credit Risk

Fueling the Energy Transition: S&P Global Essential Metals Producers Index

FAQ: Cboe S&P 500 Dispersion Index

Education - Nov 23, 2023

Barbara Velado

Senior Analyst, Research & Design ESG Indices

S&P Dow Jones Indices

EXECUTIVE SUMMARY

This paper provides transparency around the S&P PACT Indices (S&P Paris-Aligned & Climate Transition Indices), a sophisticated index solution to align with a 1.5°C trajectory (EU PAB and CTB Aligned). The indices mitigate a multifaceted range of potential financial risks, while providing exposure to opportunities companies may face from climate change, as laid out by the Task Force on Climate-related Financial Disclosures (TCFD). This paper examines four core universes, including the S&P 500^®, S&P Eurozone LargeMidCap, S&P Developed LargeMidCap and S&P Japan LargeMidCap.

The S&P PACT Index weights, relative to the benchmark index, are attributable to an exclusion effect (whether a stock is eligible for the index) or reweighting effect (how a stock performs from a climate perspective), as seen in Exhibit 1.
The exclusion effect accounts for around 20% of active weights for the S&P Climate Transition (CT) Indices across most universes, while for the more ambitious S&P Paris-Aligned Climate (PA) Indices, exclusions account for 35%-65% of deviations from benchmark weights. The reweighting effect explains the remaining active share.
The reweighting effect is driven by climate and index construction factors, which are affected by the strength of constraint, climate datasets distributions and climate factor correlations.

A company’s transition pathway, sustainability performance score (as measured by the S&P DJI ESG Score), physical risk exposure, carbon intensity and high climate impact revenues are all key drivers of weighting S&P PACT Index constituents.
Climate considerations can be appraised through different lenses, and so we use a range of different datapoints within S&P PACT Indices to capture climate in a holistic way. The high quality climate factors show low correlations between each other, hence explicitly controlling for each of them within the PACT Indices ensures a holistic approach to climate risks and opportunities.
Eligible companies can be allocated a higher weight in the S&P PACT Indices by significantly reducing their carbon intensity year-on-year, disclosing more information regarding sustainability policies and metrics, improving performance against sustainability metrics, divesting assets in locations highly exposed to physical risks, and reducing assets’ physical risk sensitivity factors.

Exploring S&P PACT™ Indices Weight Attribution: Exhibit 1

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Education - Nov 09, 2023

Factor Strategies in Brazil: A Practitioner's Guide

Rupert Watts

Head of Factors and Dividends, Product Management

S&P Dow Jones Indices

Hugo Barrera

Senior Analyst, Factors and Dividends Product Management

S&P Dow Jones Indices

What Are Factor Indices?

Capturing market idiosyncrasies and desired risk/return characteristics has been a fundamental component in the active management space for decades. Taking the fundamental ideology behind an investment strategy and democratizing it within an index allows for it to provide at minimum a gauge for relative performance and at best the ability to systematically track alpha.

When looking at factor strategies in Brazil, we will be focusing on four different strategies.

Enhanced Value: At the most basic level, the goal of investing in value stocks is to buy stocks that are “cheap” or trading at a discount relative to their peers based on company fundamentals.

Momentum: The goal of momentum investing is to capture the stocks that have had the highest price appreciation relative to their peers with the expectation that they will further outperform in a rising market.

Quality: Investing in companies that have quality characteristics seeks to capture stocks that have fundamentals that exemplify a well-run company relative to their peers.

Low Volatility/Inverse-Risk Weighted: Low volatility or inverse-risk weighted strategies allow for participation in the market even during turbulent or volatile times.

Each strategy has its own risk/return characteristics that we will discuss throughout this paper.

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Education - Nov 02, 2023

Credit VIX®: A New Tool for Measuring and Managing Credit Risk

Srichandra Masabathula

Associate Director, Fixed Income Products

S&P Dow Jones Indices

Nicholas Godec

Senior Director, Head of Fixed Income Tradables

S&P Dow Jones Indices

Introduction

The Credit VIX Indices are a new set of benchmarks that seek to measure the expected volatility of credit spreads in North America and Europe over the next one, three and six months. These indices use a modified methodology based on the Cboe^® Volatility Index^® (VIX) applied to swaptions based on S&P Dow Jones Indices’ (S&P DJI) iTraxx and CDX indices, European-style credit default swap index options, aggregating prices across different maturities and strike prices. The result is a number representing expected volatility over different Credit VIX tenors.

Credit VIX®: A New Tool for Measuring and Managing Credit Risk: Exhibit 1

The four most liquid of S&P DJI’s CDS indices underlie the Credit VIX Indices: the CDX^® North American High Yield Index (CDX.NA.HY), CDX^® North American Investment Grade Index (CDX.NA.IG), iTraxx^® Europe Main Index (iTraxx Europe) and the iTraxx^® Europe Crossover Index (iTraxx Crossover). The CDX.NA.IG/CDX.NA.HY and iTraxx Europe/iTraxx Crossover indices, each seek to track baskets of CDS in the North American and European investment grade and high yield markets, respectively. These indices are highly liquid, with large trading volumes and tight bid-offer spreads. They are also transparent, widely followed and provide broad coverage of key market segments, while focusing on pure credit risk, as opposed to corporate bonds, which include an interest rate component. This makes these indices a good starting point for the Credit VIX Indices, which aim to measure market expectations of future credit volatility.

The Credit VIX Indices provide a unique perspective on the credit markets. Unlike other credit risk measures, such as CDS spreads, the Credit VIX Indices are forward looking in that they are designed to take into account the market's expectations of future volatility. This makes the Credit VIX Indices potentially a valuable tool for market participants who want to identify market dislocations, hedge credit risk and make informed investment decisions.

Exhibit 1 shows the back-tested historical levels of the one-month Credit VIX Indices across the investment grade and high yield markets in North America and Europe. Due to the greater credit risk inherent in the high yield indices, the reactions of the VIXHY and VIXXO indices to some of the key events in credit markets is relatively more pronounced.

How to Read the Credit VIX

The Credit VIX indices are intended to provide an annualized expected volatility number for the underlying CDS index spread changes in bps. The Credit VIX index levels can be used to calculate the expected range of the underlying CDS index spread changes over the respective Credit VIX tenors of one, three and six months.

As an illustration of a theoretical calculation of the iTraxx/Cboe Europe Main 1-Month Volatility Index, assuming a VIXIE level of 30 bps and the iTraxx Europe Main Index spread of about 75 bps on a given day, the index methodology measures the market’s expectation of the spread range of iTraxx Europe Main Index over the next one month to be roughly between bps and bps. The division of the VIXIE level by the square root of 12 is used to convert the annualized VIXIE level to a monthly expected volatility number.

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Education - Oct 24, 2023

Fueling the Energy Transition: S&P Global Essential Metals Producers Index

Srineel Jalagani

Senior Director, Thematic Indices

S&P Dow Jones Indices

Introduction

Since our ancestors first discovered fire millennia ago, civilization’s continued expansion has been dependent on finding cheap and plentiful energy sources. While much of our history has been dominated by the use of biomass as the primary fuel source, our move toward industrialization in the 18^th century changed this in a couple of decades. Cheap and abundant coal that drove the machines and factories of the Industrial Revolution was added to our energy mix. More than a century passed before the transportation sector prompted another addition to our core energy sources: oil.

We have doubled our energy consumption over the past 40 years, something that took us a century to do during the 1800s. This growing demand for energy, combined with a heavy dependence on non-renewable sources, has been the norm until recently. Increased climate change awareness and rising levels of greenhouse gas emissions have driven a call to action to curb our dependence on fossil fuels. Additionally, diversifying our energy mix to increase the use of renewable energy sources is prudent risk management in economic terms.

Historically, adoption of new fuel sources came with a shift toward new technologies, like the steam powered machines of the 18^th century and combustion engines of the 19^th century. However, the current energy transition we are witnessing is driven by our goal to reduce our carbon emissions, whereby innovative technologies are being embraced with an explicit purpose of diversifying our fuel sources.

Diversification within Transition

One feature of the Energy Transition playbook is the use of metals in various technology solutions to the problem. Electrification entails demand for metals used in battery technology (lithium, cobalt, nickel), in electric vehicles (copper, aluminum) and in various industrial applications. Increasing use of renewables in our electricity generation requires the input of metals in solar cells (copper, aluminum), wind turbines (copper, rare earth elements) and geothermal power plants (nickel, chromium).

Diverse technologies at play in the shift to low carbon energy sources require a diversified group of minerals (see Exhibit 1). Some metals like lithium and cobalt find their use in battery technologies, while others like copper and chromium have wider application areas.

Exhibit 1: Critical Mineral Needs for Clean Energy Technologies

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Education - Oct 17, 2023

FAQ: Cboe S&P 500 Dispersion Index

1. What is the Cboe S&P 500 Dispersion Index (DSPX)? The Cboe S&P 500 Dispersion Index, also referred to as the Dispersion Index or DSPX, is an index that seeks to measure the expected dispersion in the S&P 500 over the next 30 calendar days, as calculated from the prices of S&P 500 index options and the prices of single-stock options of selected S&P 500 constituents, using a modified version of the VIX^® methodology.

The index level reflects an annualized statistic. For example, an index level of 20 corresponds to an expectation for a standard deviation of 20% among the annualized returns of S&P 500 constituents over the next 30 days.

The index level is calculated every 15 seconds from 9:45 a.m. to 4:00 p.m. New York time during standard equity trading days.

2. What is dispersion? Dispersion is a fundamental measure of risk and opportunity in the stock market. It measures how differently stocks are performing or are expected to perform.

Like volatility and VIX, we may measure dispersion historically or derive an expectation-based measure from the options market. DSPX is an expectation-based measure.

3. What does DSPX measure? The index measures market expectations for dispersion by comparing the prices of S&P 500 constituent stock options and S&P 500 index options with maturities around 30 calendar days.

A complementary measure to market volatility—which measures overall fluctuations in stock averages like the S&P 500—the Dispersion Index measures broad expectations for fluctuations in stocks over and above their participation in market volatility over a short-term horizon.

4. What causes DSPX to rise or decline? The index level rises when single-stock option prices increase relative to index option prices. The index level declines when single-stock and index option prices move closer in price.

The relative cost of stock and index options is driven, theoretically, by the magnitude of expected additional movement in single stocks compared to their index. Accordingly, the level of DSPX is expected to rise and fall together with market expectations for the magnitude of “opportunity” for outperformance via active stock selection among the S&P 500’s constituents.

5. Why was DSPX created? The index was developed in collaboration between Cboe and S&P Dow Jones Indices (S&P DJI), applying the VIX methodology to both single-security and index options in order to create a high frequency indicator. The index may offer:

A measure of short-term S&P 500 dispersion expectations;
A benchmark for the evaluation of contracts linked to large-cap U.S. equity dispersion; or
An indicator of the short-term tracking error that active portfolio managers benchmarked to the S&P 500 may generate through stock selection.

6. What are the inputs to DSPX? The level of the index is determined by the differences in prices of options on selected S&P 500 constituents and the prices of S&P 500 index options, as well as the weights of each constituent in the S&P 500 and representative interest rates for the period to maturity of all options included in the calculation.

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