IN THIS LIST

Measuring Board Gender Diversity across S&P ESG Indices

Indexing Islamic REITs

Talking Points:The Evolution of Index Investing in the Middle East

ESG Investing in U.S. Investment Grade Credit

TalkingPoints: A Practical Look at Index Liquidity in Asia

Measuring Board Gender Diversity across S&P ESG Indices

Introduction

According to numerous studies,1 having a gender-diverse board is a key indicator of good corporate governance.2  The gender diversity of a board of an investee company is also one of the mandatory sustainability indicators3  that financial market participants are required to assess and report on under the EU’s Sustainable Finance Disclosure Regulation (SFDR).4  Using the S&P Global SFDR dataset,5  we examine this metric in the context of the S&P ESG Indices.

First, we observe how the proportion of women on boards varies across countries (see Exhibit 1).  On average, French firms have the most gender-balanced boards.  This is unsurprising, given that the French government enforces a minimum of 40% women on boards,6  a requirement that may follow across the EU.7  Meanwhile, all Qatari firms have an entirely male board.

In terms of sectors, firms operating in Energy, Consumer Staples, Information Technology and Health Care have a greater-than-average number of women on their boards, while Materials has the lowest average (see Exhibit 2).

pdf-icon PD F Download Full Article

Indexing Islamic REITs

Contributor Image
Michael Orzano

Senior Director, Global Equity Indices

Publicly traded property stocks, including real estate investment trusts (REITs), allow market participants to obtain exposure to real estate, an illiquid asset class, without sacrificing the liquidity benefits of listed equities. They also typically offer relatively high dividend yields, may serve as an inflation hedge and could help to diversify a portfolio comprised of several asset classes. These characteristics have contributed to the appeal of REITs among both conventional and Shariah investors. Shariah-compliant real estate indices are designed to provide Islamic investors with a wider range of tools to evaluate the performance of Shariah-compliant real estate equity funds and to support ETFs and other index-based financial products.

What Is a Shariah-Compliant REIT?

The S&P Shariah and Dow Jones Islamic Market Indices evaluate REITs using the same, globally consistent methodology utilized to screen all equity securities. As shown in Exhibit 1, companies must meet both business activity and financial ratio screens in order to be included in the Islamic index.

While real estate investing tends to align with Shariah principles from a business activity standpoint, some real estate companies have exposure to non-permissible income sources such as gambling, alcohol and banking via their tenants' underlying businesses. Many REITs also tend to have relatively large debt holdings and therefore, often fail the leverage ratio requirement.

It is important to note that several countries, such as Malaysia, have specific Islamic REIT designations often referred to as i-REITs. These entities are considered Shariah-compliant by S&P Shariah and Dow Jones Islamic Market Index methodologies regardless of whether they meet the specific thresholds described in the methodology, given that they are overseen by Shariah boards that certify their operations as fully Islamic in nature.

pdf-icon PD F Download Full Article

Talking Points:The Evolution of Index Investing in the Middle East

Contributor Image
John Welling

Director, Global Equity Indices

Passive investing has accelerated throughout MENA, and adoption has become more widespread. Assets within ETFs and passive mutual funds listed in the region surpassed USD 500 million for the first time in May 2022. As regulation and markets evolve and asset managers embrace passive strategies, learn more about the indices that are fueling this growth.

  1. What can you tell us about the growth of passive investing in the Middle East?

    Although passive investing in the region is still in its early stages, the growth rate has been steadily building in recent years. Saudi Arabia was the first adopter of indexing, although the UAE has recently taken the lead. Meanwhile Kuwait, the second largest investment base, has yet to report passive funds. According to research from Chimera, there are currently 12 ETFs listed on the MENA markets—6 in the UAE, 3 in Saudi Arabia, 2 in Qatar, and 1 in Egypt. Six of these have been listed in the past two years.

    However, it is also important to note that many in the region invest via index products that are domiciled in Europe or other global markets, so it is difficult to gauge the full scope and growth of indexing driven by regional investors.

    1. What are the key drivers for the acceleration of passive investing in the MENA region?

      Similar to what we’ve seen in many other parts of the world, the MENA investment community recognizes the benefits of index-based investing, notably the lower costs and greater transparency relative to actively managed funds. In addition, the inability of most active funds to outperform broad benchmarks has also been a key contributor to the adoption of passive investing.

      In our first edition of performance finding for the MENA region, the SPIVA MENA Year-End 2021 Scorecard, we published the performance of actively managed MENA equity funds denominated in local currencies against the performance of their respective S&P Dow Jones Indices (S&P DJI) benchmark indices over 1-, 3-, 5- and 10-year investment horizons. Over a five-year period ending Dec. 31, 2021, 88% of active MENA equity funds underperformed the S&P Pan Arab Composite, while 95% of GCC funds similarly lagged the S&P GCC Composite, and 92% of Saudi funds underperformed the S&P Saudi Arabia over the same period.

    pdf-icon PD F Download Full Article

ESG Investing in U.S. Investment Grade Credit

Contributor Image
Nicholas Godec

Head of Fixed Income Tradables

S&P Dow Jones Indices

Introduction

Assets tracking ESG-based investment strategies have been booming recently. While ESG demand has increased in recent years, there’s been additional appetite in the wake of the COVID-19 pandemic. ESG refers to three key aspects of sustainability and ethical business practices: environmental, social and governance.  When measured and filtered for, ESG-based investing can provide a way for capital to flow to firms that engage in business lines and practices conducive to sustainability and high standards of ethics.  Much in the way investors have long understood risk factors related to credit, interest rates and idiosyncrasies, ESG metrics seek to capture real risk factors facing investors.

With the launch of the iBoxx MSCI ESG Advanced USD Liquid Investment Grade (IG) Index (IBOXIG ESG), the U.S. IG corporate bond market has a crucial measure for the tradable ESG IG credit market.  The IBOXIG ESG selects from the iBoxx USD Liquid Investment Grade Index (IBOXIG) universe, and then applies climate and values-based screens to create an index composed of the IBOXIG entities with above-average ESG scores relative to their industry peers.  The ESG screens exclude flagged business lines, as well as firms where the percent of revenue is linked to flagged business practices.

The climate-based screens remove issuers from the Oil & Gas sector, issuers with industry ties to fossil fuels and issuers scoring below a defined threshold for environmental controversy.  The values-based screens remove a variety of controversial business activities including adult entertainment, alcohol, civilian firearms, controversial weapons, privatized prisons, gambling, genetically modified organisms, nuclear power, nuclear weapons, palm oil, predatory lending and tobacco, as well as issuers violating the United Nations Global Compact (UNGC).  The index also removes issuers with MSCI ESG ratings of BB and below and issuers below a defined threshold for overall controversy.

pdf-icon PD F Download Full Article

TalkingPoints: A Practical Look at Index Liquidity in Asia

Contributor Image
Izzy Wang

Analyst, Strategy Indices

What role does index liquidity play in helping market participants in Asia participate in the U.S. equity ecosystem during Asia’s trading hours?

1. What are the key differences between the S&P 500® and Dow Jones Industrial Average® (DJIA®) and why do liquidity and trading volumes that are tied to these indices matter?

Izzy: The S&P 500 and DJIA are widely used gauges of U.S. large-cap equity performance. They contain many of the largest companies in the world, and the indices also underlie many of the investment products like exchange traded funds, index funds and derivatives, futures and options.

One key difference between the two indices is the weighting approach. The Dow® is price weighted, whereas the S&P 500 is the market-cap weighted. The number of constituents is also significantly different—30 for The Dow versus 500. Note also that there are no utilities or transportation companies contained in The Dow, as they are tracked separately by the Dow Jones Utility Average and Dow Jones Transportation Average.

I think we often hear about how much assets have been growing, tracking passive product index profiles in the news or media. However, there is little transparency and emphasis on the liquidity and trading volume of these products. This is unfortunate, because volume can give us a good indication of how well these products are policed by arbitrages. For example, when buying and selling, investors rely on arbitrages to make sure that ETFs are in line with the underlying index members.

When there is a market sell-off and liquidity becomes a big issue, will an ETF still be able to be sold with a price close enough to the underlying stock members? And this is when market efficiency becomes important and why indices with large ecosystems and liquidity are especially relevant. Both the S&P 500 and DJIA have a decade-long record of attracting liquidity, and they have proved of interest to arbitrages and media.

2. How do our indices tracking the S&P 500 and DJIA futures compare with other Asian headline indices underlying futures contracts? For Asian investors, why are those differences important to consider?

Izzy: The key potential advantage of having U.S. benchmark futures trade during Asian hours is for investors to transact in local time zones. The potential use case is for investors to react to market news as it happens and hedge against events that happen during Asian hours. They could also potentially adjust their positions ahead of economic releases and announcements. To achieve these potential benefits, the liquidity and bid-ask spread during Asian hours is important.

We have also done our own research in comparing the S&P 500 and DJIA versus Asian equity indices. From the angle of futures trading, we found the Asian hours liquidity of S&P 500 futures has been growing at a 13% 10-year CAGR. For The Dow, the growth rate is even higher, at 17%. Just to compare, the liquidity of S&P 500 futures has also been close to futures on the Nikkei and Hang Seng Index, which speaks to the potential use case.

The co-movement between the U.S. and Asian markets is another interesting point to consider. Co-movement is measured by correlation, with close-to-close daily return as its basis. However, such an approach may underestimate correlations between the U.S. and Asian markets because there is a difference in the trading hours. With futures trading now almost 24 hours a day, we are able to measure correlation with the same cut-off time during the day. If we do correlation in this more correct way, we see that the futures on U.S. benchmarks had meaningful correlation with Asian benchmarks, especially during crisis periods.

3. How do you define liquidity and what role does liquidity play in helping you to manage your own strategies?

Jean-Francois: Liquidity can indeed play a critical role in investors' portfolios. Looking at ETFs for example, there are several layers of liquidity available to institutional investors. The first one would be the liquidity on exchange, where investors can trade against each other. In that case, large trading volumes as well as low bid-ask spreads would be indicators of good on-exchange liquidity.

The second and third layers of liquidity for ETFs relate to the ability of investors to trade OTC and to leverage the underlying liquidity in the market by benefiting from the creation/redemption mechanism of ETFs. For example, if an investor were to purchase a large amount of ETF units in one trade, and they don’t find enough depth available on an exchange, they may still be able to trade OTC against specialized counterparties. These specialized counterparties, sometimes authorized participants, then meet this outsized demand by creating additional ETF units in the primary market. In short, ETFs are always at least as liquid as their underlying market, which is why the index they track really matters in terms of the overall liquidity.

If the primary market is liquid, then it helps to increase the liquidity in the secondary market. In addition, we have also seen synergies between different vehicles like ETFs and futures tracking the same indices when sophisticated market participants are leveraging the liquidity of ETFs and futures for their arbitrage activities.

4. How are Asia-based investors using indices to help track potential opportunities in U.S. markets?

Jean-Francois: We see through ETFs a number of different usages. Especially last year during the period of increased volatility in the U.S. with the beginning of the COVID-19 pandemic, we saw a number of investors doing tactical trends and sometimes overnight trading, trying to benefit from discrepancies and market movements between Asian hours and U.S. market hours. While we have seen that type of activity happening, we also see the classic buy and hold within the traditional asset allocation framework used by institutional investors in the region. So really, the usage in terms of ETFs tracking the S&P 500 or the DJIA is broad.

Of course, I'm talking about traditional buy-side investors, but there is also an entire crowd of index arbitragers, market makers and liquidity providers that use these ETFs for other purposes. The second part that I think is also important to highlight is we see more and more investors trading during Asian hours. There is a potential time risk by waiting for the U.S. to open, so they make use of the ability to trade ETFs tracking the S&P 500 and the DJIA during Asian hours in order to not be caught by market movements overnight.

pdf-icon PD F Download Full Article

Processing ...