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Global Sector Primer Series: Health Care

Expanding the ESG Toolkit with the Dow Jones Select ESG Real Estate Securities Indices

Bringing Transparency to an Emerging Asset Class: S&P Cryptocurrency Indices

RIATalks India: A Practical Look at Passive Investing

The S&P Europe 350 ESG Index: Defining Europe’s Sustainable Core

Global Sector Primer Series: Health Care

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Hector Huitzil Granados

Analyst, Global Equity Indices

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Michael Orzano

Senior Director, Global Equity Indices

INTRODUCTION

The Global Industry Classification Standard® (GICS®) assigns companies to a single classification at the sub-industry level according to their principal business activity using quantitative and qualitative factors, including revenues, earnings, and market perception.  The sub-industry is the most specific level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

The Health Care sector includes companies primarily engaged in:

  • Manufacturing healthcare equipment and devices;
  • Owning and operating healthcare facilities;
  • Research, development, or production of pharmaceuticals;
  • Research, development, manufacturing, or marketing of products based on genetic analysis and genetic engineering; or
  • Enabling the drug discovery, development, and production continuum.

Global Sector Primer Series: Health Care: Exhibit 1

As outlined in Exhibit 1, the S&P Global 1200 Health Care comprises 2 industry groups, 6 industries, and 10 sub-industries, and it includes all companies in the S&P Global 1200 that are classified as members of the GICS Health Care sector.

Launched in September 1999, the S&P Global 1200 provides efficient exposure to the global equity market.  The index is float-adjusted market-capitalization weighted and measures the performance of large-cap stocks from major markets around the world.  Capturing about 70% of the global market capitalization, the S&P Global 1200 is constructed as a composite of seven country and regional headline indices, many of which are accepted leaders in their regions.  These include the S&P 500® (U.S.), S&P Europe 350®, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50, and S&P Latin America 40.

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Expanding the ESG Toolkit with the Dow Jones Select ESG Real Estate Securities Indices

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Michael Orzano

Senior Director, Global Equity Indices

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Silvia Kitchener

Director, Global Equity Indices, Latin America

INTRODUCTION

More and more investors are integrating ESG considerations into their investment process.  Given the large size and specialized nature of real estate assets, the investment community has demanded sophisticated tools to more accurately identify real estate companies that own more or less sustainable properties and integrate this information seamlessly into their investment process.

S&P Dow Jones Indices has collaborated with GRESB, a leader in evaluating ESG characteristics of real estate companies, to create the Dow Jones Select ESG Real Estate Securities Indices (RESI).  The indices, which utilize data from GRESB, are designed to reflect the investment characteristics of conventional real estate benchmarks but with an improved sustainability profile, thereby providing a sustainable alternative to existing real estate offerings.

ABOUT THE INDEX SERIES

The Dow Jones Select ESG RESI are based on the Dow Jones Select RESI, a widely used listed real estate index series with approximately USD 34.5 billion of benchmarked assets.  They also utilize GRESB’s widely followed real estate assessment, which incorporates property-level data that measure such criteria as energy and water usage, carbon emissions, and leasable area covered by green building certifications, offering a deep, specialized sustainability analysis for real estate companies.  This is a key component of the overall ESG assessment each company undergoes.  The series currently includes the regional headline indices shown in Exhibit 1.

Expanding the ESG Toolkit with the Dow Jones Select ESG Real Estate Securities Indices: Exhibit 1



Methodology Overview

The indices consist of all companies included in the conventional Dow Jones Select RESI except for those deemed non-compliant with the United Nations Global Compact (UNGC) principles, companies exceeding certain thresholds of involvement in gambling, alcohol, tobacco, adult entertainment, fossil fuels, and controversial weapons, and those identified by S&P Global’s Media & Stakeholder Analysis (MSA) as involved in an ESG controversy.  The impact of exclusions is typically relatively small, given that real estate companies tend to have limited involvement in these business activities.  In fact, following the Sept. 30, 2022, rebalance, no companies were excluded from the Dow Jones Global Select ESG RESI.

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Bringing Transparency to an Emerging Asset Class: S&P Cryptocurrency Indices

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Leonardo M. Cabrer

Director, Global Research & Design

EXECUTIVE SUMMARY

  • S&P Dow Jones Indices has developed a series of cryptocurrency indices to measure this new emerging asset class.
  • The S&P Cryptocurrency Indices are designed to have broad coverage since cryptocurrencies are not homogenous, and the level of activity beyond Bitcoin and Ethereum reflects a dynamic and evolving ecosystem.
  • The goods and services provided by the projects (applications, protocols, and products created) in the ecosystem may add to the value of individual coins.
  • There is no global regulatory body for cryptocurrencies, nor is there consensus among regulators as to a response to these new innovations.
  • The S&P Cryptocurrency Indices have historically experienced high annualized returns accompanied by significant volatility and downside risk.
  • Indexing aims to bring accessibility and transparency to the digital assets market

INTRODUCTION

Because digital assets are an emerging asset class, it is helpful to discuss what cryptocurrencies (also referred to as "coins" in this document) are, how the asset class has grown, and how they are regulated. As cryptocurrencies are not identical in terms of what they offer, it is also important to understand how they can be used, along with some of the real and perceived challenges related to the asset class. This background helps to provide added context to the need for indexing to bring accessibility and transparency to this new market. The S&P Cryptocurrency Indices aim to meet these challenges. The indices are designed to serve as benchmarks for the performance of a selection of cryptocurrencies that are listed on recognized, open exchanges while meeting liquidity and market capitalization criteria.

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RIATalks India: A Practical Look at Passive Investing

RIA Talks India is an interview series where industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing and passive investing in India.

Koel Ghosh, Business Head & CEO, Asia Index Pvt. Ltd., S&P Dow Jones Indices (S&P DJI) chatted with Suresh Sadagopan, Founder, Ladder7 Financial Advisories to get his take on using passive investing as a tool for risk management.

Koel: As an index provider, S&P Dow Jones Indices would like to better understand how financial advisors use products based on indices. Please tell us about passive products like ETFs and index funds that can be used in an advisor toolkit in India.

Suresh: As a financial advisor, the choice to include various products in a portfolio is dependent upon the investor’s risk appetite, reward expectation, liquidity and tenure needs, taxation, etc. While choosing products, advisors will also have to contend with managed products and passive ones. There are merits on both sides, in some subcategories at least.

In the large-cap space, most funds are not able to beat index returns, after adjusting for fees. In mid- and small-cap spaces, active funds seem to be able to beat passive funds more frequently. Hence, having some ETFs or passive funds may be helpful in the large-cap category. Also, in the smart beta (or factor) investing space, many ETFs (and passive funds) have started sprouting up, and they could be good candidates to consider in certain portfolios.

Koel: What are some of the strategies you use, and what are the potential benefits of including passive products in a portfolio?

Suresh: It is our belief that capturing the wisdom of the markets will eventually shine over stock-picking skills. However, it may take some time to mature in India before we get to a stage similar to what the U.S. is experiencing now.

We use ETFs and passive funds that track broad indices. We also use smart beta funds as a satellite strategy in our overall passive investing strategy. However, what we do differs from client to client.

The benefits of passive investing can be manifold. Fund manager risk is mitigated, and typically lower-cost investing is facilitated. Passive vehicles may also have advantages for long-term investment in that the underlying index reconstitution infuses dynamism for a portfolio of stocks. It can help to create a manageable portfolio that encompasses nearly the entire market.

Koel: How do you position your ETF use to clients?

Suresh: We prefer index funds for their liquidity, ease of trade, lack of impact costs, and buyback. We educate our clients about why passive investing may be a good strategy and why we are choosing that for them. We also explain all the typical benefits of the passive products, including potentially the lower cost, mitigation of fund manager risk, automatic alignment periodically to a well-constructed index, etc.

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The S&P Europe 350 ESG Index: Defining Europe’s Sustainable Core

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Michael Orzano

Senior Director, Global Equity Indices

The S&P Europe 350 ESG Index is designed to meet the needs of today’s sustainability-minded investors.  Launched in 2019, this index was designed to represent the large-cap European market while offering an improved sustainability profile by excluding those companies that do not align with basic environmental, social, and governance (ESG) principles.  Further, this index is a potential solution for investment product providers seeking to adopt an index to meet the requirements of regulations, such the European Union Sustainable Finance Disclosure Regulation (SFDR).

Rather than focusing on one aspect of ESG, the S&P Europe 350 ESG Index provides insights into a wide variety of sustainability issues, such as governance, gender diversity, the environment, human rights, risk culture, cyber security, tax strategy, and many others.  The index integrates ESG scores made from 600 to 1,000 datapoints on individual issues at each company.

The S&P Europe 350 ESG Index is broad in its exposure, spanning the 11 GICS® sectors so that it is balanced in its sector composition like the underlying index, the S&P Europe 350.  This alignment is a powerful tool, ensuring that the S&P Europe 350 ESG Index faithfully represents the broad European market.

In this paper, we outline why the S&P Europe 350 ESG Index is a compelling choice for European investors and provide an overview of its methodology, sustainability attributes, and risk/return characteristics.

THE STARTING POINT: AN OVERVIEW OF THE S&P EUROPE 350

The first key to the S&P Europe 350 ESG Index is understanding the S&P Europe 350.  Introduced by S&P DJI in 1998, the S&P Europe 350 represents the European portion of the S&P Global 1200, which aggregates into one benchmark several other widely followed regional indices, including the S&P 500®, S&P/TSX 60, and other leading indices.

The S&P Europe 350 is a float-adjusted, market-capitalization-weighted index that includes the largest and most liquid stocks from developed Europe.  The index is managed in the same way as the S&P 500, in that the 350 companies are selected by the Index Committee according to a clearly defined and transparent set of rules.  Constituents are selected for the index based on size and liquidity, as well as on country and sector representation.  Like the S&P 500, the S&P Europe 350 does not simply include the largest 350 stocks in the region.  Rather, the index includes leading companies from each of the 11 GICS sectors across the 16 markets in the region.

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