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FAQ: S&P/ASX Fixed Interest Indices

Bond Laddering with the S&P AMT-Free Municipal Series Indices

Regional Relevancy of S&P 500® and Dow Jones Industrial Average® Futures in Asia

FAQ: The S&P Riskcasting Index Series

Index Construction Matters: The S&P SmallCap 600®

FAQ: S&P/ASX Fixed Interest Indices

  1. Why were the S&P/ASX Fixed Interest Indices launched?  The S&P/ASX Fixed Interest Indices were first introduced in 2011 to complement the existing S&P/ASX Equity Indices, which offer heightened transparency for equities.  S&P Dow Jones Indices (S&P DJI) and the Australian Securities Exchange (ASX) have a long history in servicing debt and equity markets on a domestic and international level.  S&P DJI, together with ASX, is a leading provider of benchmark indices for the Australian market.
  2. Which indices are currently included in the S&P/ASX Fixed Interest Index Series?  The S&P/ASX Australian Fixed Interest Index Series includes over 250 indices, covering various sectors, maturities, and ratings of the Australian fixed interest market.  These indices are designed to track investable, Australian-dollar-denominated, locally issued bonds as well as the Australian bill market.

  1. What portion of the market do these indices track?  The S&P/ASX Australian Fixed Interest Index is the flagship Australian bond index and seeks to measure the performance of Australian fixed rate bonds that meet specific investability criteria.  Offered across defined maturity buckets and sector-level indices, the index is designed to be a broad benchmark index, serving the performance attribution and benchmarking needs of the investment community.

    Maturity bucket indices for the S&P/ASX Australian Fixed Interest Index include the following.

    Credit rating band indices for the S&P/ASX Australian Fixed Interest Index include the following.

    Sector-level indices include the following.

    The S&P/ASX Bank Bill Index offers short-term exposure to Australian-dollar-denominated bank bills with maturity profiles of up to three months.  This index is designed for use by institutional investment managers, mutual fund managers, and professional advisors.

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Bond Laddering with the S&P AMT-Free Municipal Series Indices

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Jason Giordano

Associate Director, Strategy Indices

EXECUTIVE SUMMARY

  • A bond ladder theoretically offers a means to manage cash flows and provide investors with a stream of income.
  • Bond laddering with indices can capture the benefits of a traditional bond ladder strategy with additional advantages of diversification and transparency.

Bond laddering is a mechanism widely used by the investment community to mitigate the potential risks related to buying individual bonds. In this paper, we explain the potential risks, return, and diversification of using a ladder strategy in the municipal bond market.

Bond laddering is a strategy that calls for maturity weighting, which involves dividing bond investments among several different bonds with increasingly longer maturities. For example, instead of buying one bond with a six-year maturity, market participants can allocate to six different bonds, where each bond matures at a different year throughout the six-year horizon.

Bond ladders may be constructed to address both interest rate and reinvestment risk. If interest rates rise, the strategy calls for reinvestment of the funds from bonds that are maturing at the bottom of the ladder into bonds earning higher yields, and these are in turn added to the top of the ladder. If rates fall, this strategy seeks to mitigate reinvestment risk, because longer-dated bonds at the top of the ladder, which presumably were purchased when interest rates were higher, should be yielding higher returns.

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Regional Relevancy of S&P 500® and Dow Jones Industrial Average® Futures in Asia

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

Global markets are increasingly integrated, driven by the diversified global supply chain, deregulation of capital markets, and technological advances.  The interconnection of global markets has been the key driver for co-movement of market returns, especially during periods of crisis.  This has important consequences in terms of portfolio hedging and risk management.

Meanwhile, with the continued growth in exchange-traded derivatives supported by the need for increased price transparency and liquidity, investors have sought to efficiently integrate listed derivatives into their portfolios.

This paper presents the regional relevancy of S&P 500 and Dow Jones Industrial Average (DJIA) futures for hedging and risk management use by Asian investors. While the ecosystem around the S&P 500 and DJIA covers multiple areas, including trading of options, ETFs, mutual funds, etc., we are only capturing part of the complexity of Asian trading by limiting the study scope to futures. We evaluate the usefulness of those instruments through the following metrics.

  • Liquidity: As shown by aggregate U.S. dollar total value traded for the futures contracts on the two U.S. benchmarks during Asian trading hours.
  • Co-movements of markets: As measured by correlations between the two U.S. benchmarks and seven major Asian market benchmarks, based on daily returns of the futures prices at Asian end of day.
  • Flexibility: As indicated by contract size and trading hours of the futures on the two U.S. benchmarks versus other major Asian market benchmarks.

The results suggested certain benefits of trading U.S. benchmarks in Asia, providing a new perspective on the use of index derivatives to meet the needs of Asian investors.

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FAQ: The S&P Riskcasting Index Series

  1. What are the S&P Riskcasting Indices?  The S&P Riskcasting Index Series is comprised of indices that allocate between equity and fixed income indices based on a Riskcasting signal generated by S&P DJI’s partner firm, Bramham Gardens.  The objective of the index series is to allocate a higher weight to the equities under potentially favorable market conditions and conversely a higher weight to fixed income under potentially less favorable market conditions.

    As of the launch date, the S&P Riskcasting Index Series includes the following indices that change allocation to the relevant S&P equity index and the S&P 10-Year U.S. Treasury Note Futures Index.

  1. Who is Bramham Gardens?  Bramham Gardens is a Paris-based firm that specializes in artificial-intelligence-driven investment strategies that screen, anticipate, and signal market risk increases with the goal of delivering a smoother return stream while investing in equity assets.  The team is comprised of several PhDs in Financial Economics and Machine Learning.

    For more information about Bramham Gardens, please refer to the website: http://www.bramham-gardens.com/.

  2. What is the Riskcasting signal? Using information from equity options based on the S&P 500, the goal of the Riskcasting signal is to determine when to allocate to equities and when to allocate to fixed income.

    Data for the Riskcasting signal is first obtained from an S&P 500 option-derived volatility surface that measures the spectrum of investor risk aversion levels toward the equity market and the evolution of their attitudes.  All volatility surfaces are normalized and transformed using techniques to combine statistics and signal processing.  The outcome is then used to generate the Riskcasting signal.  To be more precise, this signal aggregates the answers to the following three questions, asked by means of machine learning.

    • How likely is the S&P 500 to rise more than 1% tomorrow?
    • How likely is the S&P 500 to fall more than 1% tomorrow?
    • How likely is the S&P 500 to exhibit high volatility tomorrow?

    Based on the consistency of the three answers, the Riskcasting signal is generated, recommending either a positive, neutral, or negative state.  This determined state is then used for the allocation in the S&P Riskcasting Index Series.

    It is important to note that the process of updating and learning takes place on a daily basis, relying on a rolling window of five years.

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Index Construction Matters: The S&P SmallCap 600®

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Hamish Preston

Associate Director, U.S. Equity Indices

Launched in 1994, the S&P 600 is designed to track the performance of small-cap U.S. equities and has outperformed the Russell 2000 by an average of 1.6% per year over the past 25 years. This outperformance highlights the importance of index construction; unlike the Russell 2000, the S&P 600 uses an earnings screen—companies must have a track record of positive earnings before they are eligible to be added to the index. The resulting quality factor exposure has played a significant role in explaining the S&P 600’s relative returns, and why it has been a harder benchmark for active managers to beat.

RELATIVE RETURNS COMPARISON: S&P 600 VERSUS RUSSELL 2000

Exhibit 1 shows the cumulative total returns for the S&P 600 and the Russell 2000 since Dec. 31, 1994. The S&P 600 posted higher annualized returns and lower volatility than the Russell 2000 over the entire period, and it outperformed the Russell 2000 in 17 of the past 25 full calendar year periods.

Exhibit 1

Exhibit 2 shows that the S&P 600 also typically outperformed the Russell 2000 over other horizons. Indeed, the S&P 600 outperformed over most rolling three-month, six-month, one-year, three-year, and five-year periods, with both the frequency and magnitude of outperformance increasing over longer time horizons.

Exhibit 2

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