In This List

Understanding the S&P Managed Risk 2.0 Indices

Marking 20 Years of the S&P/ASX Index Series: A Look Back at the Growth of Index-Based Investing in Australia

TalkingPoints: S&P Leverage and Inverse Indices

TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

Understanding the S&P Managed Risk 2.0 Indices

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Tianyin Cheng

Senior Director, Strategy Indices

SUMMARY

S&P Dow Jones Indices, in collaboration with Milliman, introduced the S&P Managed Risk 2.0 Indices, which seek to provide core equity strategies with an embedded risk management feature.  The key features of this strategy are the following.

  1. The cost of the protection embedded in the strategy is stable and is financed through a reserve asset, the S&P U.S. Treasury Bond Current 5-Year Index. During times when equity markets are under stress, the correlation effects between equities and the reserve asset class have historically provided a counterbalance through positive returns.  This is in contrast to strategies that use cash, which do not provide that benefit.
  2. Since protection is available, the strategy may provide the ability to participate more in the upside while keeping the overall risk at a low level. This shows up in the higher upside capture and similar or better downside capture than other risk management strategies.

Before diving into the details of the construction and performance of the strategy, it is helpful to consider why this strategy has been developed and the potential benefits it can provide.

FROM RISK CONTROL TO MANAGED RISK

Many readers may be familiar with risk control strategies.[1]  These strategies, which can use a single asset or multiple assets, dynamically adjust the exposure of a risky asset to target a predefined volatility level.  They became popular as a solution to reduce risk while retaining much of the gains to be had from “risky” assets like equities.

However, risk control strategies have some major limitations.They transform the distribution of investment outcomes in a linear and symmetric way, meaning that downside could be significant, although reduced, during severe and sustained market declines. 

Therefore, a number of managed risk strategies[2] have been created recently to improve the traditional risk control framework.  These strategies add an additional layer of risk management using a synthetic put hedge, seeking to stabilize volatility around a target level and, on top that, defend against losses during sustained market declines.

Note that this protection comes with a cost.  Although options on broad market indices are usually expensive, put option replication in the presence of volatility management tends to have lower and more stable performance costs. Therefore, these strategies enable more upside participation compared with the traditional risk control strategies. 

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Marking 20 Years of the S&P/ASX Index Series: A Look Back at the Growth of Index-Based Investing in Australia

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Michael Orzano

Senior Director, Global Equity Indices

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Sherifa Issifu

Analyst, Index Investment Strategy

A Look Back at the Growth of Index-Based Investing in Australia

Since its debut in April 2000, the S&P/ASX Index Series has helped to define the Australian equity market. As Australia’s most widely followed market indicator, the S&P/ASX 200 serves as the de facto measure of the value and performance of the nation’s stock market. Market peaks and valleys are defined by the level of the S&P/ASX 200.

Beyond the headlines, however, the index series serves an integral role in Australia’s investment infrastructure. For example, the fund management industry utilizes the S&P/ASX 200 and other S&P/ASX Indices to serve as the investable universe for active investment strategies and to benchmark fund performance. Likewise, asset owners, such as superannuation funds, use S&P/ASX Indices to benchmark their domestic portfolios. With an estimated AUD 309 billion of Australian equity funds benchmarked to S&P/ASX Indices, the series represents by far the most widely used benchmarks for Australian investment funds.

Perhaps most importantly, the S&P/ASX Index Series served as the foundation for the growth of index-based investing in Australia. The deep ecosystem of liquid financial products tracking key S&P/ASX Indices allows active and passive investors to express investment views in an efficient manner. S&P DJI’s SPIVA® research has also shined a light on the inability of most Australian fund managers to beat their benchmarks, further highlighting the benefits of passive investing. As has occurred in other parts of the world, the growth of index investing has democratized investment solutions that were previously only available to large institutions and lowered the cost of investing for millions of Australians.

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TalkingPoints: S&P Leverage and Inverse Indices

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Tianyin Cheng

Senior Director, Strategy Indices

  1. What are leverage and inverse indices and why are they important?

The S&P Leverage and Inverse Indices aim to replicate the daily performance of their underlying indices with a constant multiplicative factor, positive or negative, with or without embedded borrowing and lending costs. They offer market participants short-term trading tools for hedging and leveraging purposes. They also provide benchmarks for leverage and inverse products, such as leverage and inverse mutual funds, exchange-traded funds, exchange-traded notes, etc.

  1. What are the underlying securities of leverage and inverse indices?

The S&P Leverage and Inverse Indices can measure equities and futures indices. Examples of possible underlying equity indices would include the S&P 500® and the Dow Jones Industrial Average®.

The underlying futures indices could include equity futures indices, currency futures indices, commodity futures indices, and VIX® futures indices, such as  the Dow Jones Industrial Average Futures Index, S&P U.S. Dollar Futures IndexS&P GSCI Crude Oil, and S&P 500 VIX Short-Term Futures Index.

  1. What return types are there for leverage and inverse indices?

For equity-based leverage and inverse indices, the index return types follow the underlying indices and can be measured in price return, total return, or net total return.

For futures-based leverage and inverse indices, both excess return indices and total return indices are calculated. The difference in excess return and total return is explained in question 4.

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TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index is designed to offer liquid and tradable exposure to dividends  and low volatility, two well-known risk factors that have delivered risk premium in the China A-share market in the past.

The two factors are combined through sequential dividend and low  volatility screens. Companies exhibiting high dividend yield may fall in a “dividend trap,” since high dividend yield can be caused by decreasing stock prices rather than increasing dividend payments. Overlaying a low volatility screen on a high dividend portfolio may help to eliminate the dividend trap, resulting in improved absolute and risk-adjusted returns.[1]

Over the 10-year back-tested period, the index has shown robust return, lower risk, reduced drawdown, and cheaper valuation than its benchmark. The index may be appealing to those who wish to maintain equity exposure but limit risk or those who are interested  in increasing equity exposure without increasing risk.

Uncertainty has been a common theme throughout 2019 and rolling into 2020, with escalated risk of Covid-19. The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index may help to provide an alternative for investors to ride through this challenging period.

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TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

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Silvia Kitchener

Director, Global Equity Indices, Latin America

When it comes to small-cap equities, profitability matters. Over the past 25 years, the S&P SmallCap 600® has outperformed the Russell 2000 by almost 1.7% on an annual basis. A key driver of this outperformance was the quality bias that comes from the profitability screen that is built into the S&P SmallCap 600. What  happens when that same methodology is applied to small caps  in other markets? 

1. What are the characteristics of small-cap stocks and how have market participants used them traditionally?

An important characteristic of small-cap stocks is that they are considered growth stocks, because they have a higher potential for growth. Historically,  small caps have outperformed large caps over the long term. Studies have  shown that stocks with attractive price valuation and good growth prospects tend to outperform. Small-cap stocks also tend to be focused more domestically, offering a purer local play on Brazil growth. Furthermore, in smaller markets  like those in the Latin American region, small-cap indices can actually help develop the overall market by drawing attention to the smaller stocks, which may help create more demand for direct or indirect investment, either through individual stocks or through index-based strategies tracking small-cap indices.

2. The S&P/B3 SmallCap Select Index is part of a broader index series, the S&P Global SmallCap Select. What type of small-cap stocks do these indices track?

Small cap can be defined based on either a fixed market size or on a relative  size range, the latter being what we use in Brazil. We start with a broad view of  the market, with our country index taking into account all Brazilian companies that trade on B3 and meet the minimum size and liquidity criteria. We segment those by total market cap and then take the cumulative weight of the floatadjusted market cap to categorize the different segments. We use 70%, 15%, and 15%. The top 70% represents the large caps, the next 15% the mid caps,  and the bottom 15% the small caps.

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