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iBoxx iShares $ Corporate Bond Indices: Groundbreaking Index Construction Supports a Tradeable Listed Futures Product

Celebrating 20 Years of the S&P/NZX 50 Index and the Growth of Index-Based Investing in New Zealand

The Evolution of the Fixed Income Tradable Ecosystem

Exploring Dividend Opportunities in Australia

A Balanced Approach to China A-Shares: The S&P China A 300 Index

iBoxx iShares $ Corporate Bond Indices: Groundbreaking Index Construction Supports a Tradeable Listed Futures Product

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Nicholas Godec

Senior Director, Head of Fixed Income Tradables

S&P Dow Jones Indices

Innovative Index Design

The iBoxx iShares $ Corporate Bond Indices are the latest addition to the indices that comprise the liquid S&P Dow Jones Indices fixed income tradable ecosystem.  These groundbreaking indices were designed to be a suitable basis for USD corporate bond index futures, which didn’t exist prior to the formation of these indices and create easier market access for a wide variety of investors.

The two indices designed to underlie futures are the iBoxx iShares $ High Yield Corporate Bond Index (iBoxx iShares $ HY Corp Bond Index) and the iBoxx iShares $ Investment Grade Corporate Bond Index (iBoxx iShares $ IG Corp Bond Index).  As part of the iBoxx index series, these indices offer broad coverage of the USD high yield and investment grade liquid bond universes, providing investors with objective benchmarks against which they can measure and execute their market views.

We’ll summarize the iBoxx iShares $ HY Corp Bond Index construction methodology to highlight the unique process by which the iBoxx iShares $ Corporate Bond Indices are composed.  The process is identical for the investment grade index; however, the inputs reference the equivalent investment grade indices.

The iBoxx iShares $ HY Corp Bond Index is rebalanced monthly to match the holdings of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG ETF).  Specifically, the index cross-references the iBoxx USD High Yield Developed Markets Index (iBoxx $ HY DM Index) and the HYG ETF portfolio to form the index.  Then, the characteristics of the index universe are compared against the iBoxx $ Liquid High Yield Index (iBoxx $ LQ HY Index), the benchmark of the HYG ETF, to ensure the new index characteristics closely match the HYG ETF benchmark characteristics within defined bounds.  The characteristics are compared across ratings, sectors, duration, yield, bond count and bonds in common.

iBoxx iShares $ Corporate Bond Indices: Groundbreaking Index Construction Supports a Tradeable Listed Futures Product: Exhibit 1

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Celebrating 20 Years of the S&P/NZX 50 Index and the Growth of Index-Based Investing in New Zealand

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Sean Freer

Director, Global Equity Indices

S&P Dow Jones Indices

March 3, 2023, marks 20 years since the S&P/NZX 50 Index was launched.  The milestone is a timely reminder to reflect on the considerable evolution of New Zealand’s capital market, which is echoed in the index’s composition today.

Before we do that, let’s briefly review what has changed in New Zealand during this period.  The population has grown by nearly 30%—from under four million to over five million.  The minimum wage has more than doubled from NZD 8 to over NZD 20 per hour.  In politics, the Kiwis have seen five Prime Ministers and seven elections.  In sports, New Zealand athletes have won 25 gold medals in 10 summer and winter Olympic games.  The All Blacks have had 10 captains, while the Ranfurly Shield has changed hands 28 times. 

The Headline Index Has Reflected New Zealand’s Capital Market Growth

Twenty years ago, the S&P/NZX 50 Index (previously the NZSE 50) replaced the NZSE 40 as New Zealand’s headline stock market index.  The index is widely used by market participants and plays a pivotal role in guiding investors on liquidity, quality and performance of the market.

Since March 3, 2003, the index has increased by nearly NZD 90 billion in total market capitalization, while the largest company, as well as the average and median market capitalization have all grown approximately four to five times in size.  This has resulted in a total return of well over 500%, or an annualized return of almost 10% per year.  The S&P/NZX 50 Portfolio Index, which caps the largest constituent at 5%, has performed even better over the two decades.

S&P/NZX 50 Index Company Size Characteristics – Then and Now: Exhibit 1

New Zealanders may be accustomed to beating Australia in rugby, but is often second in terms of capital market dominance. While stock market performance has been closely matched in local currency terms, the S&P/NZX 50 Index has outperformed the S&P/ASX 200 (before fees and taxes in New Zealand dollar terms) since inception and has exhibited better risk-adjusted performance, offering lower volatility despite having only a quarter of the constituents. The same has been true when compared with U.S. equities—with the S&P/NZX 50 Index offering better return at lower risk than the S&P 500® (before taxes in New Zealand dollar terms; see Exhibit 2).

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The Evolution of the Fixed Income Tradable Ecosystem

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Nicholas Godec

Senior Director, Head of Fixed Income Tradables

S&P Dow Jones Indices

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Srichandra Masabathula

Associate Director, Fixed Income Products

S&P Dow Jones Indices

INDEXING IN FIXED INCOME

The global bond markets are extensive, with individual bonds all trading with their own unique terms, coupons and maturities.  Individual bonds are also often illiquid or difficult to source and, therefore, not broadly available. Fixed income indices have helped standardize the bond markets, taking this largely over-the-counter (OTC) market and creating defined units.  These units can be as broad as the total market or can focus on key segments like high yield or investment grade corporate bonds, mortgage-backed securities, or municipal bonds, to name a few.  Indices can be further subdivided by rating band, maturity range, sector or sustainability characteristics, among plenty of other dimensions.

Fixed income tradable indices take this one step further by offering market participants strategies that may be used as the basis for tradeable products. Fixed income tradable indices underlie financial products that take a number of forms, including ETFs, standardized total return swaps, futures and credit default swap indices. These instruments have evolved to track a liquid segment of the bond markets and offer options including inherent diversification, investability and trade efficiency. These instruments also offer transparency, given that index construction methodologies are public and memberships for indices’ underlying fixed income tradable products are often public as well. Further, fixed income tradable indices enhance transparency by providing a measure of continuous pricing to the bond markets.

Fixed income tradable indices are designed to provide an efficient means to measure the bond market. This primer is meant as an introductory reference for these instruments, as well as to highlight their performance in recent market periods. While some of these instruments measure similar market segments, each instrument type comes with unique features that make them potentially more attractive under different trade conditions.

As the fixed income tradable index ecosystem has developed, the addition of new tools has proven to be accretive to volumes across instruments (see Exhibit 1).

The Evolution of the Fixed Income Tradable Ecosystem: North American and European Credit Markets: Exhibit 1

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Exploring Dividend Opportunities in Australia

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

We examined the Australian dividend market in the paper Analyzing High Dividend Yield Strategy in Australia and saw that historically, a hypothetical portfolio comprised of high dividend yield firms in Australia outperformed the broad market portfolio.  In this paper, we will outline how practitioners may use an indexing method to seek opportunities from high dividend yield strategies in the Australian market.

The Importance of Dividends

Dividends can be critical in Australian equity investments for four reasons: 1) dividends are a significant source of total return in the equity market; 2) dividend strategies can serve as an alternative for investors looking to generate income; 3) dividends as a factor have historically generated excess total return in empirical research; and 4) franking credits provide extra tax incentives for market participants to choose high dividend yield stocks.

Dividend Contribution to Total Return

While dividends’ contribution to equity total return is widely recognized globally, it appears to be more relevant in Australia particularly.  In the U.S., dividends and dividend reinvestment have accounted for over one-third of the S&P 500® total return since 1936.  Since 2000, dividends and dividend reinvestment in Australia accounted for more than one-half of the total return for the S&P/ASX 300, higher than 32% for the U.S. and 44% globally (see Exhibit 1).

Exploring Dividend Opportunities in Australia: Exhibit 1

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A Balanced Approach to China A-Shares: The S&P China A 300 Index

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Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

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John Welling

Director, Global Equity Indices

S&P Dow Jones Indices

INTRODUCTION

China's economy and equity market have grown substantially in size and prominence over the past decade. Mainland-listed China A-shares have likewise become more accessible to global investors during this expansion, broadening the opportunity set beyond offshore shares. As of Dec. 30, 2022, over 75% of China's total equity value—equivalent to USD 11 trillion in total market cap—was represented by onshore listings, making the A-share market the second largest globally after the U.S.

Since 2004, the S&P China A 300 Index has offered efficient, representative exposure to these onshore companies. In this overview, we will cover the following key points.

  • Reasons one may want to consider China A-shares, including their underrepresentation in broad benchmarks, differentiated investment characteristics, and high return dispersions compared to offshore shares.
  • The S&P China A 300 Index has an extensive track record and offers potential methodology advantages compared with the widely used CSI 300, including:
    • The exclusion of sanctioned securities;
    • A sector balance consideration to improve industry diversification; and,
    • A profitability requirement to eliminate companies without a track recored of generating posititive earnings.

    CONSIDERATIONS FOR A-SHARE EXPOSURE

    While Chinese equities have grown in importance for international market participants, A-shares are limited to partial inclusion factors within broad benchmarks, leaving them significantly underrepresented in conventional Chinese and emerging market indices. While offshore-focused benchmarks tend to capture growth in technology-focused Consumer Discretionary and Communication Services sectors, onshore indices continue to provide broad exposure to traditional sectors and a growing share of Information Technology and Consumer Staples companies. Without representative inclusion of A-shares, China-specific exposure within indices could be considered incomplete.

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