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TalkingPoints: Introducing the S&P Global SmallCap Select Index Series

The S&P/ASX 200 Dividend Points Indices

FA Talks: How Can Indexing and ETFs Change Adviser Practice Management?

FAQ: S&P DJI ESG Scores

FAQ: S&P DJI - Axioma Collaboration: The S&P Optimized Factor Indices

TalkingPoints: Introducing the S&P Global SmallCap Select Index Series

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Michael Orzano

Senior Director, Global Equity Indices

Could incorporating earnings quality and liquidity improve risk/return in small-cap equities?

  1. Why is the S&P Global SmallCap Select Index Series being introduced now?

Prior research has demonstrated that profitability matters for small-cap companies in the U.S.1 The S&P SmallCap 600®—which includes earnings eligibility criteria— has outperformed the broader Russell 2000 Index by 2% annualized since its inception 24 years ago. Our new S&P Global SmallCap Select Index Series extends our research to global equity markets where we have found that a similar effect exists. By screening out unprofitable small-cap companies from the benchmark, we can improve risk-adjusted returns, while introducing relatively minimal tracking error (see Exhibit 1).

2. What are the key benefits of the S&P Global SmallCap Select Index Series?

Improved Long-Term Total Returns: Excluding companies without a track record of generating positive earnings has historically led to improved long-term performance in global small-cap equities. The indices have typically outperformed in down cycles and underperformed slightly in up cycles.

Reduced Risk: The indices have provided a smoother ride in the small-cap space. Volatility, beta, and drawdowns have been lower relative to conventional small-cap benchmarks.

Low Tracking Error: The indices have historically had low tracking error relative to conventional small-cap benchmarks.

Enhanced Liquidity: By eliminating the 20% least liquid and 20% smallest securities in each country, the index liquidity profile is improved, without introducing any significant geographic biases.

3. What indices are included in the S&P Global SmallCap Select Index Series?

We currently offer the regional indices shown in Exhibit 2. However, we are continuing research on additional regional and country indices and can expand this concept to other markets based on client demand.

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The S&P/ASX 200 Dividend Points Indices

  1. What are “dividend points”? Index points refer to the level of an index. For example, if the S&P/ASX 200 is trading at 6,000, it is said to have a level of 6,000 points. Dividend points specifically refer to the level of index points that are directly attributable to the dividends of index constituents. 

  1. What’s the difference between dividend points indices and other types of indices, like price return and total return indices? Price return indices represent changes in the market capitalization of index constituents. They do not account for dividends. Total return indices reinvest dividends back into the index on the ex-date of each dividend paying constituent. Total return indices therefore represent changes in market capitalization plus reinvested dividends. Finally, dividend points indices track dividend payments in isolation, reflecting the periodic cumulative dividends of all index shares. They do not include any changes in market capitalization. 

One can think of the different types of indices as representing different investment strategies. Some market participants elect to reinvest dividends in the stocks they hold, and this strategy could be benchmarked with the S&P/ASX 200 (TR). On the other hand, some market participants hold stocks but do not reinvest dividends—electing instead to take dividends in cash as a source of income. This strategy could be benchmarked with a combination of the S&P/ASX 200 Price Return and the S&P/ASX 200 Dividend Points Indices. 

  1. Why are there dividend points indices? By offering an index that represents dividend payments of S&P/ASX 200 members, S&P Dow Jones Indices (S&P DJI) allows market participants to track an important component of equity returns—independently of equity price changes. The index can also be used as a basis for financial products. 
  2. Can I invest in dividend points? No, not directly. Like other indices, it is not possible to invest directly in dividend points indices. 
  3. How many S&P/ASX 200 Dividend Points Indices are there? There is one index that resets quarterly and one that resets annually. They are called the S&P/ASX 200 Dividend Points Index (Quarterly) and the S&P/ASX 200 Dividend Points Index (Annual). 
  4. Why do the indices periodically reset to zero? The indices represent cumulative cash dividends paid over a defined period, either one quarter or one year. At the start of the next period, the indices are reset to zero so that they reflect dividends paid in discrete periods that coincide with the expiration of S&P/ASX 200 futures. Having the indices reset when futures expire is useful, because it enables the indices to potentially be used as the underlying benchmark for financial instruments that could be designed to hedge periodic dividend risk of index futures. 

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FA Talks: How Can Indexing and ETFs Change Adviser Practice Management?

FA Talks is an interview series where industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing.

Tell us about indexing and ETFs as a set of tools for advisers to use and master. What are some of your best ideas for use? And what are some potential benefits of use?

Terence: We use indexing and ETFs in order to focus on the key component of portfolio performance – asset allocation. Indexing and ETFs enable us to allocate funds in the various asset classes consistent with a clients’ circumstance or stage in life. We believe the potential advantage of this approach is that it helps eliminate risks to the portfolio associated with manager selection. Furthermore, portfolios can be constructed where there is a lower cost, comprehensive asset exposure and transparency. Our preference is to use indexes and ETFs for the core of the portfolio and then add various satellites for exposure to themes and/or managers with a particular style.

Jon: I think it is not done as often as it should be, but anyone who is going to manage a portfolio, whether it is their own or someone else’s, should complete a thorough process of articulating their investment philosophy and core beliefs. In the process that we followed, we determined that getting asset allocation right was the most important aspect, closely followed by the ability to allocate dynamically between assets over time, based on our long-term forecasts. It was then simple to identify how the historical advantages of ETFs would allow us to manage portfolios more efficiently. Using ETFs means our investment committee can spend its time on the most consequential decisions where we will have the most impact on long-term portfolio outcomes.

Andrew: Our business has always had a niche bias towards listed Australian equities. Whilst we have delivered consistently strong income returns, the capital (and therefore total return) has been volatile. In a macro environment where volatility is heightened, we are using ETFs as a tool to diversify client portfolios and to smooth out total return.

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FAQ: S&P DJI ESG Scores

COMPANY BACKGROUND

  1. Who is S&P Dow Jones Indices? S&P Dow Jones Indices (S&P DJI) is home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. The largest global resource for essential index-based market concepts, data, and research, it is a major investor resource to measure and trade the markets.

ESG at S&P DJI

S&P Dow Jones Indices has been a pioneer in environmental, social, and governance (ESG) indexing for 20 years, starting with the 1999 launch of the Dow Jones Sustainability World Index. Today, we offer an extensive range of indices to fit varying risk/return and ESG expectations, from core ESG and low-carbon climate approaches, to thematic and fixed income ESG strategies.

S&P Dow Jones Indices and SAM have a long history of collaboration since joining forces to launch the world-renowned Dow Jones Sustainability World Index in 1999.

  1. Who is SAM? SAM is a registered trademark of RobecoSAM, the Zurich-based asset management firm focused exclusively on sustainability investing since 1995. It offers in-house ESG-themed asset management, corporate sustainability assessment, and sustainability indices and benchmarking. The company was founded in 1995 and has been a partner of S&P Dow Jones Indices since 1999, when they worked together to launch the Dow Jones Sustainable Index (DJSI) Series.

S&P DJI ESG SCORES

General Questions

  1. What are the S&P DJI ESG Scores? S&P DJI ESG Scores are environmental, social, and governance scores that robustly measure ESG risk and performance factors for corporations, with a focus on financial materiality. They are a second set of ESG scores calculated by SAM, in addition to the SAM ESG Scores that are used to define the Dow Jones Sustainability Indices constituents.

The S&P DJI ESG Scores are the result of some further scoring methodology refinements to the

SAM ESG Scores that are the result of SAM’s annual Corporate Sustainability Assessment (CSA), a bottom-up research process that aggregates underlying company ESG data to score levels. The scores contain a total company-level ESG score for a financial year, comprising individual environmental (E), social (S), and governance (G) dimension scores, beneath which there are on average 21 industry-specific criteria scores that can be used as specific ESG signals (see Exhibit 1).[1]

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FAQ: S&P DJI - Axioma Collaboration: The S&P Optimized Factor Indices

  1. Who is S&P Dow Jones Indices (S&P DJI)? S&P Dow Jones Indices is the largest global resource for essential index-based concepts, data and research, and home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. More assets are invested in products based on our indices than products based on indices from any other provider in the world. Since Charles Dow invented the first index in 1884, S&P DJI has been innovating and developing indices across the spectrum of asset classes helping to define the way investors measure and trade the markets.

  1. Who is Axioma? Axioma is globally recognized as the leading provider of innovative riskmanagement and portfolio-construction solutions to financial institutions worldwide. Axioma was founded in 1998 and has established a global presence with over 350 clients, more than USD 2 trillion AUM optimized daily, over 7,000 professional users, and more than 75 daily risk models. Axioma has a “flexible is better” philosophy, providing custom tools that help clients better manage risk and to quickly and accurately design and analyze their investment strategies.
  2. Why did S&P DJI collaborate with Axioma to develop a suite of optimized factor indices? As factor-based investing has grown and continues to play an important role in client portfolios, the demand for factor indices that satisfy specific client objectives and constraints has increased. The collaboration with Axioma provides the modeling flexibility to truly service this demand and, thus, develop indices that target specific exposures. Furthermore, S&P DJI serve as a “one-stop shop” for clients looking to develop tailored factor indices—clients can work with one all-encompassing provider to seamlessly launch a new tailored factor index.
  3. What key capabilities does the collaboration offer? The collaboration combines S&P DJI’s leading index innovation, data, and research resources with Axioma’s best-in-class risk modeling and optimization capabilities. As such, the collaboration enables S&P DJI to launch the S&P Optimized Factor Indices that leverage Axioma’s modeling capabilities. These capabilities include: controlling factor exposures, targeting a specific tracking error, limiting industry and country risk, controlling index turnover, improving trading capacity, and more.

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