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TalkingPoints: The Dow Jones Emerging ASEAN Titans 100 Index

TalkingPoints: Why is the S&P 500® Relevant Globally?

FAQ: S&P/TAIFEX RMB Indices

Low Volatility: A Practitioner's Guide

Introducing the S&P U.S. Preferred Stock Low Volatility High Dividend Index

TalkingPoints: The Dow Jones Emerging ASEAN Titans 100 Index

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Michael Orzano

Senior Director, Global Equity Indices

Learn about accessing the growth of the ASEAN economies  with the Dow Jones Emerging ASEAN Titans 100 Index.

  1. What is driving interest in this index?

The Association of Southeast Asian Nations (ASEAN) region is widely recognized for its favorable demographics, including its large and fast-growing population, which, combined with rising incomes, has resulted in a rapidly expanding middle class and consumer-driven growth. In addition to the rise of the consumer, growth of the ASEAN nations is supported by strong infrastructure spending, increased market share in manufacturing due to its competitive labor force, and its outsized share of global trade. Several ASEAN nations have also reduced barriers to foreign investment in recent years, attracting the attention of global investors.

However, obtaining exposure to the ASEAN markets is challenging via conventional S&P Dow Jones Indices indexed or active solutions, given that emerging market equity benchmarks are dominated by a few large markets, such as China, Taiwan, and South Korea. For these reasons, market participants have demonstrated an interest in obtaining dedicated exposure to emerging ASEAN countries.

  1. How does the index work?

The Dow Jones Emerging Markets ASEAN Titans 100 Index seeks to measure the performance of 100 of the largest companies from Indonesia, Malaysia, Philippines, Thailand, and Vietnam. Singapore has been excluded and Vietnam has been included  in order to target less advanced ASEAN markets with the potential for faster  long-term growth.

Rather than simply including the largest companies by market cap, the index selection is based on a composite ranking of market cap, revenue, and net income. This is designed to give preference to the most well-established companies in the region that have a track record of generating sizable revenues and positive earnings while potentially tilting away from more speculative companies. It also may lend greater stability to the index composition, given the inherent volatility in company market values. In order to limit single-stock and country-level concentrations, the maximum weight of a single company is limited to 8%, while a single country weight cannot exceed 25% at rebalance.

The same methodology framework has been used within our long-established Dow Jones Titans Series, which was first launched in 1999. These same principles have now been incorporated into the ASEAN region.

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TalkingPoints: Why is the S&P 500® Relevant Globally?

The S&P 500 is a renowned benchmark for large-cap U.S.  equities and is widely referenced as the gauge of U.S. equity  performance. But what is the relevance of the U.S. market  and the S&P 500 internationally?

  1. When we talk about the U.S. market, just how big is it?

Jodie: The S&P 500 is the proxy for the U.S. market, and it represents about 80%-85% of the U.S. stock market. But from a global perspective, the U.S. is over one-half of the global stock market, as measured by the S&P Global BMI. This really matters because as the U.S. economy grows, it propels the stock markets of all other countries—and the U.S. stock market is largely driven by consumer spending. So really, the more a exports to the U.S., the more sensitive it becomes to U.S. growth. For example, a country like Korea has a high sensitivity and on average, rises nearly 9.5% for every 1% Head of U.S. Equities  of U.S. growth, whereas the UK only grows about 2.5%. So you can see the differences S&P Dow Jones Indices in impact per country.

  1. In light of the importance of the U.S. market—proxied by the S&P 500—what’s the ecosystem around the S&P 500 itself?

Tim: That’s one of the important differentiating factors of the S&P 500. In most markets, S&P 500-based products will be among the most liquid, most traded, and most invested among all the other alternatives.

Part of that is because it’s not just about the benchmark itself, rather it’s about the availability of the different aspects that are available in a tradable format. We can mention futures, options, and the VIX®—if you were to pick one macro indicator that the rest of the world watches to gauge not just the U.S. but the global economic health, it would probably be the VIX, which is based on S&P 500 options. Then we have S&P 500 sectors, and smart beta or factors, such as momentum. An ecosystem has grown around the different investment aspects, pieces, segments, and characteristics of over the many years since it was first launched in 1957. There’s a phenomenal wealth of not just data but also products that are internationally relevant.

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FAQ: S&P/TAIFEX RMB Indices

INDEX DESIGN

1. What are the S&P/TAIFEX RMB Indices? The S&P/TAIFEX RMB Index Series comprises the S&P/TAIFEX RTF RMB Index (USD) and the S&P/TAIFEX RHF RMB Index (USD).  These indices seek to track the performance of the inverse of the nearest quarterly month RTF or RHF futures contract traded on the Taiwan Futures Exchange (TAIFEX), reflecting the number of U.S. dollars per offshore Chinese renminbi (RMB) for Taiwan and Hong Kong.  For the S&P/TAIFEX RMB Indices, 1x inverse and 2x leverage versions are available and are designed to generate the inverse of and twice the daily excess return of the underlying indices. 

2. Why were the S&P/TAIFEX RMB Indices created? There has been increasing demand for RMB-denominated assets and a growing trend of internationalization of the RMB.  In collaboration with the TAIFEX, S&P Dow Jones Indices (S&P DJI) has created this index series that enables more effective management of exposure to Chinese yuan currency risk and speculation of the yuan through investment products tracking the S&P/TAIFEX RMB Indices, as well as their inverse and leverage counterparts.

3. What are the differences between the RTF and RHF futures contracts? There are two key differences in terms of contract size and final settlement prices.  The RTF and RHF have contract sizes of USD 20,000 and USD 100,000, respectively.  For the final settlement price, the RTF uses the spot USD/CNY(TW) fixing published by the Taipei Foreign Exchange Market Development Foundation, while the RHF uses the spot USD/CNY(HK) fixing of the Treasury Markets Association of Hong Kong.

INDEX CONSTRUCTION

1. How are the S&P/TAIFEX RMB Indices designed? The S&P/TAIFEX RTF RMB Index and the S&P/TAIFEX RHF RMB Index seek to measure the return from a long position in the inverse of the first quarterly month futures contract.  By using the inverse of the futures contract price, the S&P/TAIFEX RMB Indices are denominated in U.S. dollars, although the RTF and RHF futures contracts are quoted in Chinese renminbi per U.S. dollar.  In this way, the indices’ levels rise when the renminbi appreciates (reflected by the respective futures price movement) and vice versa.

2. How are the futures contracts rolled? To improve the capacity of the index, a five-day staggered rolling is implemented.  Specifically, over a five-day rolling period every quarter, starting 10 trading days and ending 6 trading days prior to the futures last trade day (including the last trade day), the index rolls to the second quarterly month contract, with 20% of the portfolio being rolled each day.  Exhibit 1 provides an example roll period, showing the mechanics of the roll period based on the last trade dates of the underlying futures contracts.

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Low Volatility: A Practitioner's Guide

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Hamish Preston

Associate Director, U.S. Equity Indices

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Tim Edwards

Managing Director, Index Investment Strategy

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Craig Lazzara

Managing Director, Global Head of Index Investment Strategy

S&P Dow Jones Indices (S&P DJI) produces a range of low volatility indices, covering various single-country and international markets.  These indices offer a perspective on the returns of lower volatility equities and provide a basis for index-linked products and benchmarks globally.  This practitioner’s guide:  

  • Explains the construction of low volatility indices;
  • Identifies the role of broader market trends, valuations, interest rates, and sector exposures in determining their performance;
  • Highlights the potential applications of low volatility strategies; and
  • Summarizes the evidence for the existence and potential persistence of the so-called “low volatility anomaly.”

Exhibit 1 illustrates an important aspect of low volatility indices: their potential to offer higher risk-adjusted returns than the market benchmark from which they were derived.

INTRODUCTION

Basic financial theory is predicated on the idea that higher-risk investments should be priced to offer commensurately higher returns.  Unfortunately for the theory, a growing body of empirical evidence—accumulated since the 1970s[1]—suggests that, across a wide range of time horizons, geographies, and market segments,[2] stocks with lower volatility have displayed higher risk-adjusted returns.

Meeting the need for low volatility benchmarks, S&P DJI’s low volatility indices track the performance of a portfolio of the least volatile stocks selected from a given benchmark universe, such as the S&P 500.  Indeed, the first-ever low volatility index was the S&P 500 Low VolatilityIndex, launched in April 2011.  Many more have been produced since.[3] 

The performance and risk/return characteristics of these indices, both over hypothetical back tests and subsequent to their launch dates, provide further confirmation that lower-risk stocks can offer superior performance characteristics.  Exhibit 1 provides a summary for a selection of low volatility indices based on various benchmarks over the last 15 years, displaying the improved risk/return ratios of each low volatility index in comparison to its corresponding parent benchmark. 

In light of the growing popularity of products (such as ETFs) offering access to low volatility strategies, a growing body of research identifying and quantifying the drivers of low volatility performance has emerged. These include the role of sectoral allocations, interest rate sensitivities, and equity valuations.  In what follows, we shall briefly summarize the salient points that emerge from this research.

More directly to practitioners’ interests, we shall also examine the portfolio applications of low volatility strategies, in either a multi-factor or multiasset context.  We conclude by addressing the question of whether or not the so-called “low volatility anomaly” of higher risk-adjusted returns might continue.  

Note that while our results extend in spirit to many similar equity strategies, our focus will be restricted to the indices produced by S&P DJI.  Accordingly, we begin with a summary of the methodology used to construct our low volatility indices, and a brief examination of the practical consequences of using historical volatility rankings to form equity portfolios.

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Introducing the S&P U.S. Preferred Stock Low Volatility High Dividend Index

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Hong Xie

Senior Director, Global Research & Design

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Phillip Brzenk

Senior Director, Strategy Indices

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Aye Soe

Managing Director, Global Head of Product Management

INTRODUCTION TO PREFERRED STOCKS

What Are Preferred Stocks?

Preferred stocks are hybrid securities, blending characteristics of stocks and bonds.  They sit between common stocks and bonds in a company’s capital structure, thus having a higher claim on a company’s assets and earnings than common stocks, while having a lower claim than bonds (see Exhibit 1).

Like common stocks, preferred stocks represent ownership in a company and are listed as equity in a company’s balance sheet.  However, certain characteristics differentiate preferred stocks from common stocks.  First, preferred stocks provide income to investors in the form of dividend payments, typically providing higher yields than common stocks.  Second, preferred shareholders lack voting rights, resulting in less influence on corporate policy.  While common stock shares offer investors the potential for share price and dividend increases, investors generally look to preferred stocks for their high-yielding, stable dividend payments.

Preferred stocks are issued at a fixed par value, similar to bonds, with most paying a scheduled fixed dividend.  Preferred stocks are rated by independent credit rating agencies.  The rating is generally lower than bonds since preferred stocks offer fewer guarantees and have a lower claim on assets.  While a company risks defaulting if it misses a bondcoupon payment, it can withhold a preferred dividend payment without facing default risk.[1]

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