IN THIS LIST

FAQ: iBoxx ESG Index Series

Introducing the S&P/ASX 200 High Dividend Index

FAQ: S&P Guarded Indices

FAQ: S&P/B3 Ibovespa VIX

U.S. High Yield Index Trading: The Kinetic Chain of High Yield Liquidity

Education - Apr 05, 2024

FAQ: iBoxx ESG Index Series

Company Background

Who is S&P Dow Jones Indices (S&P DJI), and how did iBoxx become part of the S&P DJI brand? S&P Dow Jones Indices (S&P DJI) is home to iconic financial market indicators, such as the S&P 500^® and the Dow Jones Industrial Average^®. Through the merger with IHS Markit, the iBoxx brand became part of S&P DJI, bringing with it the widely recognized fixed income benchmarks across corporate credit, tradeable and sovereign bond indices.

Sustainability at S&P DJI

S&P DJI has been a pioneer in environmental, social and governance (ESG) indexing for 20 years, starting with the 1999 launch of the Dow Jones Sustainability World Index. Today, we offer an extensive range of indices to fit varying risk/return and ESG expectations, from broad-based sustainability and low-carbon climate approaches to thematic strategies.

Who is S&P DJI’s ESG data provider? S&P Global, a parent company of S&P DJI, provides the data that powers S&P DJI’s globally recognized equity and fixed income indices. iBoxx also collaborates with external partners to leverage a multitude of ESG datasets to fulfill specific client demands.

iBoxx ESG Indices

What is the iBoxx ESG Index Series? The iBoxx ESG Index Series is a set of market-capitalization-weighted indices that target securities meeting specific sustainability criteria on corporate bond indices. The index series includes suites across the following two ranges:

iBoxx Corporates SRI Screened
iBoxx Corporates ESG

Why was the iBoxx ESG Index Series created? The iBoxx ESG Index Series was launched to provide an ESG-oriented and investable expansion of leading market benchmarks, such as the iBoxx corporate bond indices across currencies, including the euro (EUR), U.S. dollar (USD) and pound sterling (GBP), and across the investment grade and high yield universes.

What indices are in the iBoxx ESG Index Series? The iBoxx index series consists of the following index families:

iBoxx USD Corporates SRI Screened
iBoxx EUR Corporates SRI Screened
iBoxx GBP Corporates SRI Screened
iBoxx USD High Yield Corporates Developed Markets SRI Screened
iBoxx EUR High Yield Corporates SRI Screened
iBoxx USD Corporates ESG
iBoxx EUR Corporates ESG
iBoxx GBP Corporates ESG
iBoxx USD High Yield Developed Markets Corporates ESG
iBoxx EUR High Yield Corporates ESG

Each index family includes a comprehensive suite of subindices spanning across maturities, ratings and sectors. Further indices or index families may be available in the future.

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Education - Apr 04, 2024

Introducing the S&P/ASX 200 High Dividend Index

Izzy Wang

Associate Director, Factors and Dividends

S&P Dow Jones Indices

Jason Ye

Senior Director, Factors and Dividends

S&P Dow Jones Indices

Introduction

The S&P/ASX 200 High Dividend Index seeks to measure the performance of 50 companies with the highest 12-month forecast dividend yield from the S&P/ASX 200. From July 2011 to December 2023, the index had an average trailing 12-month dividend yield of 5.6% and an annual excess return of 2.2% compared with the S&P/ASX 200.

The Australian equity market is well known for its high dividend yield and well-cultivated dividend culture. With over AUD 5 billion AUM in exchange-traded products (ETPs), dividend income has become one of the most popular factor strategies in Australia.

However, strategies chasing the highest-yielding stocks could be vulnerable to “dividend traps.” High dividend yield may come from decreasing stock prices rather than increasing dividend payments. In addition, selecting stocks based on historical dividend payments may not reflect a company’s prospects.

The S&P/ASX 200 High Dividend Index seeks to mitigate common risks faced by high dividend yield strategies using two tactics. First, it applies momentum screens. Excluding stocks with low price momentum could avoid high-yield stocks driven by deteriorating prices, thus may help to eliminate the dividend trap. Second, it uses forecast dividend data. Selecting stocks based on 12-month forecast dividend data that is forward-looking may help to reflect the latest market expectations on a company’s future dividend payments.

Over the 12-year back-tested period, the S&P/ASX 200 High Dividend Index has shown significant outperformance, with higher dividend yield and cheaper valuation than the broad market benchmark. For market participants seeking high yield and diversification benefits, the S&P/ASX 200 High Dividend Index could help to complement broad market allocation as well.

Index Construction

First, starting from the S&P/ASX 200 universe, all A-REITs and stocks without a positive 12-month forecast dividend yield are excluded. Second, eligible stocks ranked in the bottom 10% by momentum value are screened out. Finally, the 50 constituents with the highest 12-month forecast dividend yield are selected.

To balance between the index yield and index capacity, the 50 selected names are weighted by the product of the 12-month forecast dividend yield and the float market capitalization. To avoid stock concentration risk, the weight of each stock within the index is capped at a minimum of 10% or five times the stock’s weight in the index universe. In terms of sector diversification, each sector can have maximum of 15 stocks, and its weight cannot exceed the sector weight in the index universe plus 10%. The index is rebalanced semiannually in January and July.

Introducing the S&P/ASX 200 High Dividend Index: Exhibit 1

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Education - Mar 19, 2024

FAQ: S&P Guarded Indices

Company Background

1. Who is S&P Dow Jones Indices? S&P Dow Jones Indices (S&P DJI) is the largest global resource for essential index-based concepts, data and research, and it is home to iconic financial market indicators, such as the S&P 500^® and the Dow Jones Industrial Average^®. More assets are invested in products based on our indices than in products based on indices from any other provider in the world. Since Charles Dow invented the first index in 1884, S&P DJI has been innovating and developing indices across the spectrum of asset classes, helping to define the way investors measure and trade the markets.

2. Who is S&P Global Sustainable1? S&P Global Sustainable1 is a leader in carbon and environmental data and risk analysis and assesses risks relating to climate change, natural resource constraints and broader environmental, social and governance (ESG) factors.

S&P Guarded Indices

3. What are the S&P Guarded Indices? The S&P Guarded Indices measure the performance of eligible securities from an underlying index, selected and weighted in an attempt to collectively enhance ESG profiles and reduce the carbon footprint with respect to the underlying index. The indices apply exclusions based on companies’ involvement in specific business activities, performance concerning the principles of the United Nations Global Compact (UNGC) and involvement in relevant ESG controversies.

4. What ESG datasets are used in the S&P Guarded Indices Methodology? The indices use several climate, ESG and business involvement datasets, as shown in Exhibit 1.

FAQ: S&P Guarded Indices: Exhibit 1

5. Why are these datasets used in the S&P Guarded Indices Methodology? The purpose of the index methodology is to minimize the deviation in constituent index weights from their benchmark weights while satisfying multiple constraints, including those on carbon intensity, as well as S&P Global ESG Scores. The datasets help achieve that purpose and help manage the constraints. The constraints are defined using the datasets from the data sources noted in Exhibit 1.

For more information on how the indices are calculated, see the index methodology.

6. What indices are in the series? As of 16, 2024, the indices available in this series are:

7. How are ESG controversies dealt with in the S&P Guarded Indices Methodology? The S&P Global Media & Stakeholder Analysis (MSA) monitors ESG controversies, which include a range of issues such as economic crime and corruption, fraud, illegal commercial practices, human rights issues, labor disputes, workplace safety, catastrophic accidents and environmental disasters.

The Index Committee reviews constituents that have been flagged by the S&P Global MSA to evaluate the potential impact of controversial company activities on the composition of the indices. In the event that the Index Committee decides to remove a company, that company would not be eligible for re-entry into the indices for one full calendar year, beginning with the subsequent rebalancing.

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Education - Mar 19, 2024

FAQ: S&P/B3 Ibovespa VIX

What is the S&P/B3 Ibovespa VIX? The S&P/B3 Ibovespa VIX seeks to measure the 30-day implied volatility in the Brazilian stock market. It is a real-time index that reflects investor sentiment about the expected volatility in the Brazilian benchmark equity index, the Bovespa index (Ibovespa B3). It is the first implied volatility index designed for the domestic market and uses the same methodology framework as the widely followed Cboe Volatility Index (VIX^®), which measures near-term volatility implied by S&P 500^® options prices.
How is the index calculated? The S&P/B3 Ibovespa VIX is calculated throughout each trading day by averaging the weighted prices of a specific group of Ibovespa index options. The index generally uses put and call options in the two nearest-term expiration months in order to bracket a 30-day calendar period. Variances at these two different expirations are derived and are interpolated to calculate a constant 30-day variance. VIX is derived by transforming this variance into a standard deviation and multiplying by 100. Please see the methodology document for complete details regarding the calculation methodology.
How does VIX indicate market sentiment? Implied volatility typically increases when markets are turbulent and the economy is faltering. In contrast, if stock prices are rising and no dramatic changes seem probable in the near-term, VIX tends to fall or remain steady at the lower end of its range. Since VIX reaches its highest levels when the stock market is most unsettled, the media tend to refer to VIX as a “fear gauge.”

What is the difference between implied and realized volatility? Implied volatility refers to the market’s assessment of future volatility based on options prices, whereas realized volatility measures historical volatility of returns. VIX measures implied volatility, specifically 30 days in the future.
What does a VIX level signify? The index level represents an annualized volatility statistic. For example, an index level of 20 corresponds to an expectation for a standard deviation of 20% in Ibovespa returns over the next 30 days. VIX also projects the probable range of movement in the equity market above and below its current level, over the next 30 days. When implied volatility is high, the VIX level is high and the range of values is broad. When implied volatility is low, the VIX level is low and the range is narrow. Mathematically, a relatively low VIX level of 10 implies an expected range of the Ibovespa of plus/minus 2.9%. A relatively high VIX of 35 implies an expected range of the Ibovespa of plus/minus 10.1%.
What is the relationship between the S&P/B3 Ibovespa VIX and the Ibovespa? Volatility indices and their associated equity indices are typically negatively correlated—meaning they tend to move in opposite directions. Based on back-tested data from May 6, 2021, we’ve observed a negative correlation between the S&P/B3 Ibovespa VIX and the Ibovespa of -0.59.

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Education - Mar 18, 2024

U.S. High Yield Index Trading: The Kinetic Chain of High Yield Liquidity

Nicholas Godec

Senior Director, Head of Fixed Income Tradables & Commodities

S&P Dow Jones Indices

Executive Summary

The high yield bond market is fragmented in nature and primarily trades over the counter. Each bond carries unique credit risk, coupons, maturities, optionality and levels of liquidity. Bilateral trades introduce counterparty risk, which investors consider in addition to the credit analysis of high yield bond issuers.

High yield indices reflect the high yield market and aid investors with price discovery. For instance, as measured by the iBoxx^® USD High Yield Developed Markets Index, we can understand that the notional size of the USD high yield bond market has grown by only 6.5% over the past five years, to approximately USD 1.4 trillion, while delivering an aggregate total return of 28.2% over the same five-year period.

U.S. High Yield Index Trading: The Kinetic Chain of High Yield Liquidity: Exhibit 1

We can also understand that, with a yield of 7.6% and a duration of 3.6 years as of Dec. 31, 2023, USD high yield bond yields are approximately 100 bps higher than the prior five-year average, while index duration is 0.2 years lower than the five-year average. This detail helps summarize the overall market in single point figures, creating clarity from the noise.

U.S. High Yield Index Trading: The Kinetic Chain of High Yield Liquidity: Exhibit 2

High yield indices help enable understanding of these and other market characteristics because they include risk/return statistics at the index level and underlying bond level published daily, along with static data such as rating, sector and maturity breakdowns. Bond prices fuel daily index calculations, so reliable pricing that powers high yield indices is paramount. The Pricing Team of the S&P Global Market Intelligence division provides component pricing for the iBoxx USD Liquid High Yield Index and CDX High Yield, including end-of-day and intraday pricing. Pricing is determined by several factors, including executed trades, dealer quotes, banks’ books of record and model inputs like issuer curves and comparable assets. The pricing process is overseen by expert pricing analysts who cover specific markets and who review the algorithmic pricing process.

This pricing visibility informs index-tracking tradeable products, like ETFs, futures, total return swaps and swaps on credit default swap indices. Options markets linked to such instruments provide investors with new ways to trade high yield credit volatility. Each instrument becomes an additional source of market color for investors, which drives greater market efficiency, including for those who do not trade index-linked products.

So, high yield indices help standardize and describe the market. At the same time, high yield index-tracking tradeable products provide high yield investors with ways to trade and invest according to these standard definitions. Tradeable high yield index products have evolved to primarily trade within a centrally cleared framework, which mitigates counterparty risk.

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