In This List

How Indexing Impacts Shariah-Compliant Investing

Why Taking a Local Approach to Index Construction Matters in Canada

Indexing GARP Strategies: A Practitioner's Guide

Sector Primer Series: Industrials

Practice Essentials - Understanding Commodities and the S&P GSCI®

How Indexing Impacts Shariah-Compliant Investing

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Michael Orzano

Senior Director, Global Equity Indices

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John Welling

Director, Equity Indices

Shariah-compliant investing has grown considerably in recent decades, as the Islamic investment community has demanded increasingly sophisticated investment solutions that adhere to the tenets of Islamic law. As a result, the need for high-quality, transparent, Shariah-compliant benchmarks has developed.  Today, Islamic indices serve a critical role in Islamic finance; these unique indices identify the universe of securities available for investment and define the way Islamic investors measure the markets.

INTRODUCING ISLAMIC INDICES

Islamic indices are subsets of conventional benchmarks that include only companies that pass rules-based screens for Shariah compliance.  The resulting Shariah indices tend to be highly correlated to their conventional non-Shariah counterparts and provide Islamic investors with Shariahcompliant versions of a wide variety of popular benchmarks.  For example, the S&P 500® Shariah is a subset of the widely recognized S&P 500, and it includes only Shariah-compliant constituents of the S&P 500.

As with all Islamic financial products, a supervisory board of Islamic scholars oversees the rules governing Shariah-compliant indices.  The board is responsible for defining and maintaining the rules governing the Shariah screening process.  However, S&P Dow Jones Indices retains oversight on all other index methodology issues, including rules for company selection in the benchmark index, weighting, and index maintenance.

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Why Taking a Local Approach to Index Construction Matters in Canada

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Michael Orzano

Senior Director, Global Equity Indices

While nearly everyone in the Canadian investment community has heard of  the S&P/TSX Composite, few are aware of the key methodological Senior Director intricacies that distinguish it from other broad market Canadian equity benchmarks.

The most notable distinction is that the S&P/TSX Composite is designed specifically for Canadians (as are all S&P/TSX Indices), while many other Canadian equity indices, such as the FTSE Canada All Cap Index, are simply country slices of global benchmarks and, therefore, take the perspective of foreign investors.  Why might this matter?  Canada has foreign ownership limits that affect several industries, such as telecommunications, broadcasting, transportation, and real estate.  Therefore, whether or not these limits are accounted for in the index is significant.

As an example, Bell Canada (BCE)—the largest Canadian telecommunications company—was the 10th largest company in the S&P/TSX Composite, with a weight of 2.3%, as of June 28, 2019 (see Exhibit 1).  However, foreign investors are restricted from owning more than one-third of BCE under Canada’s Telecommunications Act.  As a result, BCE’s weight in the FTSE Canada All Cap Index is reduced by two-thirds from its natural market-cap weighting to roughly 0.75%.

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Indexing GARP Strategies: A Practitioner's Guide

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Bill Hao

Director, Global Research & Design

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Aye Soe

Managing Director, Global Head of Product Management

THE GARP STRATEGY

Growth at a Reasonable Price (GARP) is a well-known, much-practiced investment approach.  It is a fundamental-driven investment strategy that balances pure growth and pure valuation, as the former tends to invest in high-growth, yet expensive stocks, while the latter may take a long-term investment to pay off.  Primarily, the GARP strategy favors investing in companies with consistent earnings and sales growth, reasonable valuation, and solid financial strength, combined with strong profitability.  The underlying investment thesis of the S&P 500® GARP Index seeks to track the GARP strategy and earn higher risk-adjusted returns than its underlying universe over a long-term investment horizon.

In this paper, we introduce the S&P 500 GARP Index, its strategy, construction methodology, risk/return profile, factor exposures, and attribution analysis.

ESTABLISHING THE MULTI-FACTOR FRAMEWORK

We use a systematic bottom-up approach for stock selection and portfolio construction (see Exhibit 1), which we summarize as follows.

  1. Define the investment universe (the S&P 500).
  2. Identify factors with the potential to fulfill the GARP investment strategy.
  3. Select sensible factors for multi-factor metrics.
  4. Select constituents with well-defined rules.
  5. Construct a constituent portfolio with a predefined weighting methodology.

We use three-year EPS and SPS growth metrics to capture a firm’s growth.  In order to maintain sustainable growth, a firm needs to be highly profitable (high ROE) and not have excessive leverage (low financial leverage ratio).  We also use the earnings-to-price ratio to gauge a firm’s reasonable valuation.  These factors effectively enact the characteristics of the GARP strategy.

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Sector Primer Series: Industrials

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Louis Bellucci

Senior Director, Index Governance

INTRODUCTION

The Global Industry Classification Standard® (GICS®) assigns a company to a single business classification according to its principal business activity.  This assignment uses quantitative and qualitative factors, including revenues, earnings, and market perception.  The sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.  GICS was developed in 1999 and is jointly managed by S&P Dow Jones Indices and MSCI.

The Industrials sector comprises companies primarily engaged in:

  • Producing capital goods, such as manufacturers of aerospace and defense products, building products, electrical equipment, and machinery, as well as diversified industrial conglomerates;
  • Providing commercial and professional services; and
  • Transportation such as railroads, air freight and logistics, airlines, and trucking.

COMPOSITION

The S&P 500® Industrials comprises all companies in the S&P 500 included in the sector by GICS.  Created in 1957, the S&P 500 was the first broad U.S. market-cap-weighted stock market index.  Today, it is the basis of many listed and over-the-counter investment instruments.

The Industrials sector is the sixth most heavily weighted of the 11 sectors within the S&P 500.  As of Dec. 31, 2018, the sector represented 9.20% of the S&P 500 (see Exhibit 2).  Since the index is market-capitalization weighted, this sector has an above-average influence on the overall index performance.

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Practice Essentials - Understanding Commodities and the S&P GSCI®

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Jim Wiederhold

Associate Director, Commodities and Real Assets

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Fiona Boal

Head of Commodities and Real Assets

EXECUTIVE SUMMARY

S&P Dow Jones Indices has been providing index-based performance measures of real assets since 2007. Whether you prefer equity-based exposure to companies that produce commodities, or more direct exposure through futures contracts, S&P Dow Jones Indices offers tools for better understanding and accessing commodities market exposures. This paper focuses on understanding commodities as an asset class as well as the S&P GSCI, a preeminent measure of a basket of commonly traded commodities futures contracts.

WHAT ARE COMMODITIES?

Commodities such as gold and oil frequently capture media and investor attention.  So what are commodities, and why are some financial advisors considering allocating portions of their clients’ portfolios to commodities and other real assets?

Commodities are:

  • Basic, standardized real assets that are in demand and can be supplied without substantial product differentiation across markets;
  • Fungible, or in other words, considered equivalent for trading purposes despite coming from different producers; and
  • In the case of physical goods traded as commodities, widely used as production inputs.

Because commodities are fungible and traded on exchanges globally, commodity prices are driven by global supply and demand. These performance characteristics set commodities apart from equity or fixed income investments, whose returns are linked to additional market fundamentals.

Some commodities, such as precious metals, are held for their store of value characteristics. However, since the storage costs of many commodities are prohibitive, some investors may use futures contracts to gain commodities exposure and avoid physical delivery or storage costs. Still, the question remains: is it better to physically hold a commodity like gold, or be diversified across a basket of commodities futures?

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