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S&P BSE SENSEX Index Series

Why Energy May Halt This Commodity Rally

Q&A: What is factor investing?

Exchange-Traded Protection

2016 Market Performance through the Lens of Smart Beta

S&P BSE SENSEX Index Series

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Mahavir Kaswa

Former Associate Director, Product Management

S&P BSE Indices

The S&P BSE SENSEX is India’s bellwether index and is a globally recognized benchmark.  With the recent launch of the S&P BSE SENSEX 50 and S&P BSE SENSEX Next 50, Asia Index Pvt. Ltd. has expanded its S&P BSE SENSEX Index Series.  The newly launched indices are designed to measure the top 50 companies and the next set of 50 companies after the top 50 in the Indian market, respectively. Like other S&P BSE Indices, both adopt rules-based, transparent, and objective index methodologies.

Constituents are selected from the top 100 companies based on float-adjusted market cap and stringent liquidity filters.  The top 50 companies form the S&P BSE SENSEX 50, while remaining 50 companies from the pool form the S&P BSE SENSEX Next 50.

All three indices are diversified by BSE sectors, which reflect the respective weights of the sectors in the Indian market.  The key differences between these indices are number of companies covered and sector/size coverage. Finance and Information Technology are two largest BSE Sectors in S&P BSE SENSEX and S&P BSE SENSEX 50 indices; however Basic Materials and Finance are the two largest sectors in S&P BSE SENSEX Next 50 index. S&P BSE SESENSEX and S&P BSE SENSEX 50 covers nearly 52% and 65% of free float market capitalization of S&P BSE AllCap index respectively.

All three indices are designed to be investable, and their methodologies require stringent liquidity filters. The indices are weighted by float-adjusted market cap, similar to the methodology used by other index providers globally.  In order to keep index composition current and relevant to the market, the indices undergo rebalancing semiannually, in June and December.

Let’s look at the performance of each of them.

Exhibit 1: Performance of S&P BSE SENSEX Indices

Source: Asia Index Private Limited and S&P Dow Jones Indices LLC.  Data as of March 6, 2017.  Past performance is no guarantee of future results.  Chart is provided for illustrative purposes and reflects hypothetical historical performance.  The S&P BSE SENSEX 50 was launched on Dec. 6, 2016.  The S&P BSE SENSEX Next 50 was launched on Feb. 27, 2017.

Exhibit 2: Risk/Return Characteristics of S&P BSE SENSEX Indices
Absolute Returns YTD 9.2% 9.8% 14.1%
Annualized Returns (CAGR) 1 Year 19.67% 21.68% 37.43%
5 Year 12.81% 13.26% 17.89%
10 Year 10.20% 10.73% 15.50%
Annualized Volatility 1 Year 12.34% 12.38% 16.50%
5 Year 14.89% 14.88% 18.56%
10 Year 23.63% 23.55% 24.07%

Source: Asia Index Private Limited and S&P Dow Jones Indices LLC.  Data as of March 6, 2017.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes and reflects hypothetical historical performance.  The S&P BSE SENSEX 50 was launched on Dec. 6, 2016.  The S&P BSE SENSEX Next 50 was launched on Feb. 27, 2017.

Since nearly 80% of S&P BSE SENSEX 50’s index weight overlaps with constituents of the S&P BSE SENSEX, the risk/return characteristics of the indices are similar.  The S&P BSE SENSEX Next 50 has a unique set of 50 companies, with nearly 55% of the index weight coming from mid-cap stocks, and it has shown consistently higher total returns than the other indices, with marginally higher volatility.

Exhibit 3: Sector and Size Composition
Basic Materials (%) 1.2 2.7 23.8
Consumer Discretionary (%) 10.0 11.9 7.0
Energy (%) 11.3 11.2 7.4
Fast Moving Consumer Goods (%) 10.8 9.9 13.9
Finance (%) 31.4 32.5 19.9
Healthcare (%) 6.6 5.8 9.2
Industrials (%) 8.9 7.5 11.2
Information Technology (%) 13.9 13.4 1.3
Telecom (%) 1.8 1.9 2.8
Utilities (%) 4.1 3.2 3.5
Total (%) 100.0 100.0 100.0
LargeCap (%) 100.0 99.2 45.0
MidCap (%) 0.0 0.8 55.0
Total (%) 100.0 100.0 100.0

Source: Asia Index Private Limited.  Total returns and volatility as of March 6, 2017.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes and reflects hypothetical historical performance.  The S&P BSE SENSEX 50 was launched on Dec. 6, 2016.  The S&P BSE SENSEX Next 50 was launched on Feb. 27, 2017.

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

Why Energy May Halt This Commodity Rally

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Jodie Gunzberg

Former Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

Although OPEC agreed to cut production to help support the oil price, they may have miscalculated their power as a cartel.  The U.S. producers are filling in the gap causing inventories to soar, and that has caused the S&P GSCI Crude Oil index to fall 9.4% this month. It is the biggest 9-day decline since the period ending Nov. 7, 2016, when OPEC raced to produce ahead of the planned supply cut implementation.

Generally there is a low correlation of 0.28 between non-energy and energy commodities, using daily data back to Jan. 2, 1987.  Recently, the correlation has been rising, and while not excessively high, the pace at which it is increasing is noticeable.  On Jan. 13, 2017, precisely two months ago, the 30-day correlation between the S&P GSCI Energy and S&P GSCI Non Energy was -0.11, increased to 0.05 by Mar. 1, and is now 0.35, going from uncorrelated to moderately correlated in a short time.

Source: S&P Dow Jones Indices.

Now there are 17 commodities besides crude oil that are negative month-to-date through March 13, 2017, that is the most down in a month with oil since Nov. 2015, when there were 21 down.  It is far worse than when oil was down in Jan. 2017 with only 9 other commodities.

Source: S&P Dow Jones Indices.

Finally, the commodities that usually hold up with oil declines are now crumbling.  Normally several of the agriculture and livestock (coffee, soybeans, wheat, live cattle, lean hogs and corn) do well on average when oil drops.  Historically, corn holds up best, gaining 56 basis points on average in months oil falls.  Further, none of the non-energy commodities typically lose more than 1% in an average month that oil loses, but now the losses are substantial with greater than 1% drops month-to-date in 12 of 13 non-energy commodities that are down with oil.

Source: S&P Dow Jones Indices.

Silver, live cattle and nickel are worst performing so far through March, 13, down 8.1%, 8.3% and 7.4%, respectively. Additionally, every sector is negative for the first time since Nov. 2015, including the industrial metals that were so promising have now fallen near 3% month-to-date in Mar. with only lead marginally positive, putting into question the optimism of growth that industrial metals (copper) are known for predicting,


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

Q&A: What is factor investing?

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Chris Doll

Vice President, Product & Business Strategy

PowerShares Canada

We recently hosted Tim Edwards, Senior Director, Index Investment Strategy at S&P Dow Jones Indices, for an in-depth discussion about factor-based investing and the role it can play in a diversified portfolio.

Chris: What is factor investing? What are the factors?

Tim: To be a factor, two things in particular need to be true. The first is that it needs to be a characteristic of stocks that explains the differences between returns.  For example, a company’s size can often help explain their performance.  Size is a factor.  The second characteristic of a factor is that it is something that can be measured and captured.  For example, whether a stock is going to outperform would be very useful to know, but we don’t know which ones will do that.  So, that is not a factor.  The term “factor investing” really means investing in portfolios specifically designed to capture certain factors.

Chris: Factor investing is rooted in decades of research. Can you talk about some of the better-known factors, those that have shown persistence as consistent drivers of returns?

Tim: In markets across the world, lower-risk stocks have historically shown an improved risk/return profile, which has led to a wealth of research on the “low volatility” factor.  Perhaps even more famously, the value factor has accumulated close to a century’s worth of research and study.  Two more factors that are very commonly looked at include size – small companies tend to outperform large companies – and momentum, which is the concept of identifiable trends within individual equities, relative to each other and to the market.

Chris: Why have certain factors provided better risk-adjusted returns historically and how is this likely to persist in the future?

Tim: The outperformance of a few factors, I would identify low volatility, value and momentum in particular, has been the source of much academic and practitioner debate.   The long-term outperformance from these factors is, of course, a challenge to the efficient market theories preferred by academics.  For investors, the more pertinent question is whether they have the right exposures to these factors, and if the historical pattern of outperformance will continue.

Chris: What has the evolution of indexing meant for investors trying to seek factor returns or capture factor returns?

Tim: A good few decades ago, offering market-like returns was a highly rewarded activity. In time, managers’ performance began to be increasingly compared to broader market benchmarks. Then those same benchmarks became investible, at a relatively low cost, via the first index funds. Other strategies in the purview of active management eventually followed: value, risk management or momentum strategies became widely available in indices. As time passed, it became increasingly apparent that the core patterns of returns that many funds were offering were systematically replicable through a market exposure and a few select factor tilts. I see it as something of a democratization process, in which these forms of investing are examined, systematized, indexed and eventually made available to investors through index-linked investment products, typically at a much lower cost and with greater transparency.

Chris: In your mind is factor investing a free lunch? Is there a way for investors to know when to rotate between factors to end up with a better result than the market?

Tim: I would caution against a belief that any one of these, or any one combination of these, will deliver persistent constant outperformance. There’s no magic recipe that gives you the perfect solution over every time period, each of these factors will ultimately be affected by the macro environment.  Having said that, there is obviously the opportunity for investors to either diversify or better calibrate their exposure to factors either with the goal of a long-term outperformance, or better navigating the current environment.

Click here to access the full interview.

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

Exchange-Traded Protection

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Michael Mell

Global Head of Custom Indices

S&P Dow Jones Indices

New exchange-traded funds (ETFs) are being created, and while that means we can expect innovation throughout the fund and indexing industries, “a proliferation of new funds could mean heightened risks for investors, particularly regarding ETFs, because many of those funds don’t trade frequently, making them more volatile.”[1]  ETFs are arguably responsible for a rapidly democratizing investment landscape.  Today, almost any firm can launch an index to be tracked by an ETF; one does not need to be an asset manager with billions under management.  Furthermore, market participants of any size can access strategies through an ETF that previously had been only available through hedge funds and investment banks.  However, with the increasing number of ETFs, it is imperative to better understand these funds and make informed decisions.

Is it an ETF?  If it Is, What Does That Mean?

The term ETF must always be qualified and investigated if the sought structure is a passive, index-tracking product that holds stocks—otherwise you may end up with something very different.

There are exchange-traded notes (ETNs), exchange-traded mutual funds (ETMFs), active ETFs (ETFs that don’t track an index), and within ETFs certain funds can be structured differently and not hold a single stock.  For example, grantor trusts can hold an interest in a physical commodity such as gold, while limited partnerships are more likely to be used for commodity-centric ETFs with exposure to futures contracts.  These structures are ETFs, but they can behave differently than open-ended funds and unit investment trusts, which many often mistakenly think follow the general structure of an ETF.  Open-ended funds and unit investment trusts are where one will most likely find a passive, index-tracking ETF that holds stocks.

ETMFs and active ETFs both should automatically be discounted if one is seeking a passive, index-tracking ETF.  ETNs can be passive and index tracking; however, their structure can introduce credit risk since they don’t hold any securities.  Rather, they are unsecured, unsubordinated debt securities issued by an underwriting bank.  Notably, a bank may close down even profitable ETNs “to clean up the liabilities on their balance sheets,”[2] whereas the closure of a profitable ETF is less likely.

Even ETFs Can Die

ETFs can close down.  In fact, “while ETFs have enjoyed explosive growth over the past decade, a record number of them—127—closed up shop last year, and liquidations are showing no sign of slowing.”[3]  So choosing an ETF structure does not guarantee anything, including the survival of the ETF, even if the performance is stellar.  In short, unless the ETF is profitable, the fund sponsor probably won’t keep it around for long.  That is why looking at the size of an ETF’s assets under management is important.

It’s All About the Index

So now we know enough to not consider certain vehicles just because they are exchange traded (whether they be funds or other types of products).  Even if they are true, passive ETFs that track an index or profitable ETNs, they are not immune to being shut down.  However, the most important factor to look at is the index.  The index will tell you what the ETF is attempting to achieve—it’s the code by which the fund runs.  With the growing number of ETFs and firms launching their own indices, it’s become critical to know who the index sponsor and calculation agent are.  Specifically, is the index administered by a reputable firm that complies with IOSCO principles?  Does the ETF track an index that was created by the fund sponsor (i.e., self-indexing) or an affiliate of the fund sponsor?  If so, is that self-created index independently calculated?  Assuming it is independently calculated, who exactly is calculating the index?

While there are no guarantees in financial markets, you can obtain some exchange-traded assurance when you want a truly passive ETF by understanding the structure of the fund, knowing that some may shut down, and the fund’s underlying index.  In an earlier blog,[4] I discussed a formulaic approach to ETF identification to help anyone in their quest for exchange-traded information.  Don’t be shy about using it.

[1]   Dave Michaels,

[2]   Sumit Roy

[3]   Simon Constable


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

2016 Market Performance through the Lens of Smart Beta

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Akash Jain

Director, Global Research & Design

S&P BSE Indices

Participants in the Indian equity market in 2016 may have been disappointed with the muted performance by broad equity market indices (the S&P BSE SENSEX was up 3.47% for the year), while other asset classes such as bonds showed strong performance (the S&P BSE Bond Index was up 13.2%).  Where could market participants have found alpha to generate higher returns in the past year?

The report Factor Risk Premia in the Indian Market, published by S&P Dow Jones Indices, studies the risk/return characteristics of common risk factors in the Indian equity market.  The report highlights that, historically, the best-performing factor in up markets has been value, whereas in down markets, low volatility and quality have performed well.  It also identifies low volatility and quality as strong defensive factors and value as a strong pro-cyclical factor.

In December 2015, S&P BSE launched four smart beta indices based on four factors—momentum, value, low volatility, and quality.  Since these indices were launched, the Indian equity market has gone through two major downtrends (from Dec. 1, 2015, to Feb. 11, 2016, and Sept. 9, 2016, to Dec. 31, 2016) and one major uptrend (Feb 12, 2016, to Sept. 8, 2016), as of year-end 2016.  Exhibit 1 summarizes the performance of the factor indices in each market trend and the overall period.

Source: S&P Dow Jones Indices LLC.  Data from Dec. 1, 2015, to Dec. 30, 2016.  Index performance based on total return in INR.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes.  The uptrend period is from Feb. 12, 2016, to Sept. 8, 2016, and the downtrend periods are from Dec. 1, 2015, to Feb. 11, 2016, and Sept. 9, 2016, to Dec. 31, 2016.

Aligning with its long-term performance characteristics, in 2016, the S&P BSE Enhanced Value Index showed significant outperformance in the up-trending market, with an annualized excess return of 41.4%.  Despite its underperformance of 17.8% per year during the downtrend, it recorded a net gain of 15.5% per year for the entire examined period.  However, the S&P BSE Enhanced Value Index experienced significant drawdown of 24.3% in the last quarter of fiscal year 2015-2016, the worst among the four factors.  Over the same period, momentum was the best-performing factor on a risk-adjusted basis, generating an annual return of 13.7% with an annualized volatility of 17.3%.  The majority of the S&P BSE Momentum Index excess return was dominated by its outperformance (with an annualized excess return of 18.8%) during the market rally.

In contrast, the S&P BSE Low Volatility Index was the laggard among the factors in the up-trending market, but it was the best-performing factor when the market was down.  It had the lowest return volatility over the period studied, proving itself an effective tool for downside protection.  Similarly, the S&P BSE Quality Index had relatively lower return volatility and the smallest drawdown among the four factors, highlighting the defensive characteristics of the quality factor.

Given the unique characteristics of each risk factor, factor-based investing is a potential way for market participants to implement their active views.  The increasing number of passive smart beta investment products available could help market participants to implement different smart beta strategies in a transparent and cost-effective manner.

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