Explore how the equity and fixed income trading ecosystems are evolving in response to the continued growth of asset-tracking indices and what it could mean for investors with S&P DJI’s Tim Edwards and Anu Ganti.
[TRANSCRIPT]
Michelle Yu
Hi, everyone.
How are equity and fixed income trading ecosystems evolving in response to the continued growth of asset-tracking indices? Well, we're going to tackle that very topic right now.
Welcome to Asset TV, I'm Michelle Yu, and joining me today to explore the continued growth of the index liquidity landscape and what that means for investors are Tim Edwards and Anu Ganti from S&P Dow Jones Indices' Index Investment Strategy team, and it's always great to have them here in our studios.
And, I want to start with what is index liquidity and why is it relevant to market participants? And, with that, hello, everyone. Anu, let's have you kick it off.
Anu Ganti
Yes, so indexing is an important part of financial markets, and the growth of index-based products can have benefits for both active and passive users. And, one of the ways that we can measure liquidity is through trading volumes. And, they can tell us how active these users are, as well as how good a job are arbitrators doing at policing the market. And, if you look at just the S&P 500, there are roughly USD 273 trillion in volumes tied to The 500™ alone. And, now if you think about products derived from The 500, like sectors, factors, dividends, that's an additional USD 5 trillion. And, together, that forms a robust trading ecosystem.
Now, there are certain network effects of liquidity, and we can break down these benefits. One is just price discovery. We have products all around the world, and they trade almost 24 hours a day. So, we no longer have to wait until the exchanges are open to understand the impact of overnight events. A really good example of that is U.S. equity markets typically open close to where the futures were just trading. Another benefit is just market efficiency. So, if you look at prices based on the ETFs tracking The 500, those are based on this ecosystem. And, for example, you have market makers in there trying to minimize those mispricings, trading combinations of different trades, across the derivatives space. Now, finally, you put all this together, and that inspires confidence. Confidence that the S&P 500 is tracking the U.S. large-cap equity space and that the ETF, in this example, is tracking the index. And, I would like to emphasize that this has benefits for both active and passive users.
Michelle Yu
Thank you for that, Anu.
And, I think another question our audience would love to know is how is usage of index-linked products evolving and what innovations are making that possible? Tim, what do you think?
Tim Edwards
Look, it's absolutely fascinating. As Anu said, the growth in usage of indices, whether it's the basis of an investment vehicle or a trading vehicle, has been one of the major evolutions in the financial markets over the past two decades. And, what our research does is it just gives you up-to-date perspectives and identifies some of the newer trends.
Some of the things we found interesting in the 2024 data, first off, perhaps surprisingly, overall, the average holding period went down slightly across the complex. We saw more trading overall, and people holding for shorter periods, on average. Now, that's a, sort of, 10,000-foot view.
On a more granular perspective, we've been writing for some time about the evolution of the fixed income markets and increased usage of passive as an investment vehicle. There's always been fixed income trading. So, it's fascinating when you go a level down. We're actually seeing the holding periods of fixed income going up a little bit. That's suggestive that there is increased adoption of passive investment strategies with using tools like fixed income ETFs. The other thing we've seen, which is really a reaction to the way that risk is being expressed in the markets right now. A while ago, it was the sort of risk on, risk off. You're either in equities or in U.S. Treasuries. And, what we saw in our latest data was growth on the next level down of granularity. People using different countries, different sectors, different industries, to express their views.
Michelle Yu
I want to go deeper on this now and talk about how sectors and industries are helping market participants express views and the size and impact of this ecosystem on these applications. Anu, what are your thoughts?
Anu Ganti
Yes, so sector-based products are not new. And, if you look at the trading volumes for S&P 500 sectors, we've seen that they've grown to over USD 3 trillion as of 2024, rising by roughly USD 1 trillion since 2019. And, this is across exchange-traded products and the derivative space. But, what was particularly notable was the increased usage of futures within sectors and industries. And, we actually saw that volumes, three-month volumes, surpassed USD 100 billion in 2024, roughly tripling from 2019. So, that was really interesting to watch.
And, now, if you think about the use cases for sectors, you can think about active investors expressing a top-down view to asset allocation, can easily use sectors to express those views. Also, bottom-up investors can use sectors to express views on stocks relative to sectors. Also, sectors are really unique and interesting, and we've done some research on this, because they have that greater capacity, in terms of market capitalization, to express those views. So, you put it all together, and going back to the points we made earlier, sector trading can help add to price discovery, market efficiency, on a more granular level.
Michelle Yu
And, finally, some may think of index-linked products as a passive story, but S&P Dow Jones Indices' research shows it extends to active strategies as well. And, with that, I want Tim to walk us through all of it.
Tim Edwards
Yes, it's traditionally considered passive investing, index investing, is almost interchangeable terminology. However, on many days, not every day, on many days, the most-traded security in the world is an index fund. So, that's an S&P 500 ETF, in particular. Our data suggests that it has an average holding period across the complex measured in days, if not weeks, a couple of weeks, maybe. The reality is that index-based products are used by passive investors and by active investors, and it's actually that active use case that is, first of all, becoming increasingly powerful, because you've got a broader toolkit. It's not just the S&P 500. It's the different industries and sectors. It's different factors, it's different countries. It's different parts of the fixed income markets. It allows investors to express their views, and by expressing their views, battle to compete to get the price right. So, it can be a force to improve transparency, market efficiency, which is to the benefit of everyone.
But, I think the real power behind this research is it shows you how active, or not, users of index-based products are. And, the answer is, yes there are some very passive use cases and some very passive users. There's some very highly active, even high-frequency, players in that market as well.
Michelle Yu
Alright, Tim, Anu. Always great to have a couple of financial connoisseurs here in our Asset TV studios. Great to see you guys. Thank you.
And, that will do it for us here on Asset TV for now. For a deeper dive into the liquidity landscape and to explore trading linked to S&P DJI indices, visit the link below.
I'm Michelle Yu, and I'll see you next time here on Asset TV.
