A Look at the Investability and Replicability of the S&P/BMV IPC

In a prior blog, Getting to Know the S&P/BMV IPC – An Iconic Representation of the Mexican Equity Market, we examined the evolution of the S&P/BMV IPC and tracked its role from being a financial market indicator to serving as the basis for index-linked liquid investment products. In this blog post, we look at the investability criteria incorporated in the index methodology, allowing it to meet the liquidity needs of market participants and index-linked investment products.

The investability of an index is a function of two variables—the liquidity of the underlying constituents and the weight of the securities in the index. For instance, a security with low liquidity should not necessarily have a high weight in the index, all else being equal. Moreover, the investability of an index determines its investment capacity.

Therefore, index design should strive to achieve an investable and replicable index for the target market. With that in mind, we look at the index mechanics of the S&P/BMV IPC and review how the methodology addresses liquidity needs. Some of the most relevant points were:

  • Weighting scheme: In 1999,[1] the S&P/BMV IPC methodology changed from total market-cap weighted to a float-adjusted market-cap weighting scheme. The index also employs additional constraints to reduce concentration risk: no single stock’s weight can exceed 25% and the aggregate weight of the five largest stocks cannot exceed 60%.
  • Minimum float inclusion criteria: The free float factor measures the percentage of company shares available to be traded in a market. The S&P/BMV IPC methodology added this requirement in 2012[2] as inclusion criteria for constituents. To be part of the S&P/BMV IPC, stocks must have an investable weight factor (IWF) of at least 10%.
  • Volume-weighted average price (VWAP) float-adjusted market cap inclusion criteria: To be part of the S&P/BMV IPC, stocks must have a minimum VWAP float-adjusted market cap of MXN 10 billion (MXN 8 billion for current constituents). VWAP float-adjusted market cap is calculated by multiplying the number of shares outstanding by the assigned company’s IWF and by the VWAP over the prior three-month period.
  • Median daily value traded (MDVT) inclusion criteria: to be part of the S&P/BMV IPC, stocks must have a MDVT of at least MXN 50 million (MXN 30 million for current constituents) over the prior three- and six-month periods.
  • Median traded value ratio (MTVR) inclusion criteria: Stocks must have an annualized MTVR of at least 25% over the prior three- and six-month periods.

Do these index mechanics improve the overall liquidity profile of the index? We reviewed the daily trading volume of the S&P/BMV IPC constituents to find out. As of Nov. 30, 2018, the six-month MDVT of the index was around USD 8.80 million on average, compared with that of S&P/BMV IPC CompMx constituents at USD 5.29 million. Hence, the S&P/BMV IPC was nearly 50% more liquid than the broader index.

A quick capacity analysis using the index composition as of Nov. 30, 2018, and the constituents’ six-month MDVT showed that a portfolio of USD 140 million could be completely traded in a single day (assuming 100% of the six-month MDVT). On the other hand, trading the same portfolio size on the broader S&P/BMV IPC CompMx would take double that amount of time.

Currently, the S&P/BMV IPC serves as the underlying benchmark for an ETF with assets of over USD 3 billion.[3] The size of this index-linked product is a testament to the importance of having a liquid and investable underlying benchmark.

[1]   The S&P/BMV IPC Turns 40

[2]   The S&P/BMV IPC Turns 40

[3]   Source: ETFGI. https://etfgi.com/news/press-releases/2018/10/etfgi-reports-assets-etfs-and-etps-listed-latin-america-see-net-inflows. ETFGI is the leading independent research and consultancy firm on trends in the global ETF/ETP ecosystem and is based in London, England. Deborah Fuhr, Managing Partner, co-founder, ETFGI website www.etfgi.com.

The posts on this blog are opinions, not advice. Please read our disclaimers.

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