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The Trump Rally – Or Is That Global Sector Diversification?

Commodities: A Deeper Dive Into the Five Potential Sources of Return

A Quick Primer on Benchmark Regulation

The Investment Opportunity in China’s “New Era”

Commodities: Five Potential Sources of Return

The Trump Rally – Or Is That Global Sector Diversification?

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Phillip Brzenk

Senior Director, Strategy Indices

S&P Dow Jones Indices


This is the final post in our blog series that examines the domestic large-cap equity market performance, as represented by the S&P 500®, since the 2016 U.S. election.[1] We use the geographic revenue exposure of S&P 500 constituents to better understand whether or not Trump’s proposed U.S.-centric economic policies have had an impact on the equity market. In our last two posts, we looked at the performance of the Domestic Revenue and the Foreign Revenue Portfolios, as well as their macroeconomic risk exposures. This post investigates the sector-level performances of the Domestic and Foreign Revenue Portfolios.

The 11 sectors in the S&P 500 widely vary in their overall percent of total revenue obtained from the U.S. Sectors with relatively high revenue exposure to the U.S. (compared to the overall S&P 500 average) include financials, real estate, telecommunication services, and utilities, while information technology and materials tend to be more exposed to the global economy. Exhibit 1 shows the average percentage of revenue coming from the U.S. at the sector level and for the overall S&P 500 on Election Day.

Given that the constituents of the aforementioned revenue portfolios are selected based on their percent of revenue exposure, one could infer that the sector tilts of each portfolio reflect the S&P 500 revenue exposure composition. Observing the sector weights of the Domestic Revenue and Foreign Revenue Portfolios compared to the S&P 500 on Election Day confirms this (see Exhibit 2). For example, Exhibit 1 shows that the average company in the information technology sector received 47% of its revenue from the U.S., which is substantially lower than the overall S&P 500 company average (70%). Unsurprisingly, there was a significant overweight to the information technology sector in the Foreign Revenue Portfolio (active weight of 15.12%), while the Domestic Revenue Portfolio showed minimal exposure (active weight of -19.76%).

So, are the performance differentials between the two portfolios that we presented in the first post a result of tilting the S&P 500 sectors? To determine if this is the case, a sector attribution analysis was run for the time period (Nov. 8, 2016–Oct. 31, 2017). Attribution analysis breaks out the performance differences between each portfolio and the S&P 500 into an allocation effect and a selection effect. The allocation effect shows the impact of the active sector bets in the portfolios, while the selection effect demonstrates the impact of security selection within each sector.

Several conclusions can be made from Exhibit 3. First, the Foreign Revenue Portfolio benefited from sector bets and stock selection; however the majority of the excess return versus the S&P 500 came from the selection effect. This illustrates that leveraging geographic revenue data to tilt sector weights and select individual securities contributed to the positive alpha of the portfolio. Secondly, the resulting underperformance of the Domestic Revenue Portfolio came from the attribution and selection effects in near equal proportion.

The analysis provided in this blog series demonstrates that allocating toward the sectors or industries that were expected to benefit from “Trumponomics” would not have been rewarding in relative performance terms. In fact, the opposite has been true. Perhaps due to the absence of implementation of any of the proposed policies, confidence in any of them becoming reality has deteriorated in the marketplace.[2] Instead of claiming the last 12 months to be the Trump Rally (self-proclaimed,[3][4] or otherwise), maybe it can be called the “Multinational Corporations Rally.”

[1]   See first post here:
See second post here:

[2]   In the October 2017 World Economic Outlook report, The International Monetary Fund revised GDP Growth projections for the U.S. in 2017 and 2018 downward from their April 2017 report, specifically due to significant uncertainty of the proposed economic policies, such as tax cuts, actually taking effect:

[3] and


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

Commodities: A Deeper Dive Into the Five Potential Sources of Return

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Marya Alsati

Product Manager, Commodities, Home Prices, and Real Assets

S&P Dow Jones Indices


In a prior post, we listed five components of returns that commodities futures can provide. In this post, we will delve deeper into each component.

Insurance risk premium, according to Keynes’s theory, is earned when a market participant rolls their futures position and the price of the next futures contract is discounted against market expectations of the future spot price. A producer would enter into a short position (sell) in the futures market by offering a price that is lower than the expected price of the good at the delivery date, the holder of the long (buyer) position in the contract would profit from the producer’s potential loss, and the producer would accept this potential “loss” for a guaranteed price for the product. This is also why the volatility of the spot price is high when inventory is low.

Collateralization, or collateral return, is important because there is a low correlation between the nominal level of short-term interest rates and the spot return from commodities prices, so the collateral return provides diversification to the overall return achieved by market participants. In addition, this return tends to increase in periods of high inflation as central banks raise short-term rates, hence collateral return provides a form of inflation hedging.

Convenience yield, which is the implied return on inventories or “additional payment” that a commodity producer is willing to pay for the needed raw material, is to ensure this input is available in a timely manner to avoid delays or disruptions in production. Convenience yield is positive when the price of a commodity increases from a shortage (or inaccessibility to a commodity, like what happens to oil prices with geo-political risk), which provides a premium for the convenience of having the commodity when needed.

Convenience yield varies depending on the type of commodity, as commodities have different costs of storage, as well as the ability to produce more or less of a certain commodity during shorter time horizons. For example, an oil driller’s ability to produce oil after a fire that shuts down a certain refinery differs from a cocoa producer with drought-damaged crops. Some commodities are also interchangeable; for example, while cocoa has no replaceable counterpart, soybean oil can be easily replaced by palm or canola oil.

Expectational variance, historically, has had more positive than negative incidence in the commodity market, because a shock caused by a shortage due to a drought or a pipe burst is more likely to occur than a demand-side shock, or a sudden drop in demand, similar to what happened in the cattle industry during the mad cow disease period in the mid to late 1990s.

Expectational variance can provide diversification benefits because the price changes are driven by commodity-specific drivers that are completely independent from capital markets and other commodities.

Rebalancing, or roll return, is the difference in the price of the expiring contract and the next eligible contract. Futures contracts expire on a regular basis, and futures-based indices must roll their positions into the next contract to maintain their exposure.

If a commodity’s forward price curve is downward sloping (in backwardation), then the roll process involves rolling into (buying) a futures contract that is trading cheaper than the current futures contract. However, if the commodity’s forward price curve is downward sloping (in contango), then the roll process would involve rolling into a futures contract that is trading at a higher price than the current futures contract.

If the futures in the index are in backwardation regularly over time, and if the incidence of backwardation is higher relative to the degree of contango, then market participants tracking the indices will tend to profit from the roll process.

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

A Quick Primer on Benchmark Regulation

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Jamie Farmer

Chief Commercial Officer

S&P Dow Jones Indices


What Is It?

The Benchmark Regulation (BMR) is a key part of the European Union’s (EU’s) response to the LIBOR scandal and the allegations of similar manipulation of foreign exchange and commodity benchmarks.  It is intended to protect investors by requiring greater transparency and stronger governance among firms that: 1) provide, 2) contribute to, or 3) use a wide range of interest rate, currency, securities, commodity, and other indices or reference prices.

Why Does It Matter?

The BMR is extensive in scope and impact because of the wide use of benchmarks throughout the EU.  Benchmarks are common reference values and performance measures for exchange-traded and conventional funds, structured notes, options, swaps, forwards, and other instruments.

Where and to Whom Does It Apply?

The BMR applies to the “use of a benchmark within the Union”[1] and to EU-based firms that are benchmark users, administrators, and contributors.  Further, the BMR applies to benchmarks used in the EU but provided by administrators located outside of the EU; S&P Dow Jones Indices would be such an example.

  • Users: In general, those that issue financial instruments (as defined in Section C of Annex I of MiFID2) or issuers of investment funds (UCITS/AIFs) tracking the return of an index or that use indices to determine the amount payable under an investment fund.
  • Administrators: Publishers of benchmarks and/or indices.
  • Contributors: Those supplying inputs necessary for the calculation of benchmarks and/or indices (other than regulated or other readily available data).

To be clear, the BMR does not place any requirements on those investing in financial products.  Rather, it is germane to those publishing, contributing to, or issuing financial products based on benchmarks.

When Is It Effective?

The BMR actually builds upon the Final Report of the Board of the International Organization of Securities Commissions (IOSCO) for Principles for Financial Benchmarks dated July 2013 (IOSCO Principles).  Since their introduction four years ago, S&P DJI has annually certified its adherence to those principles.  The BMR—which now creates formal legal requirements, as distinguished from the best practices or principles prescribed by IOSCO—will apply starting Jan. 1, 2018.[2]  There is a transition period[3] and the use obligations will be phased in.

How Does the BMR Affect S&P Dow Jones Indices?

As noted, even though we are a U.S.-based administrator, S&P Dow Jones Indices will fall under the BMR since our benchmarks are used within the EU.  This, despite the fact that the impetus for this framework (the aforementioned scandals) dealt with benchmarks far removed in nature, governance, and calculation from those calculated by S&P DJI.

An equivalence decision (that is, a decision by the EU Commission that a third country—e.g., the U.S.—has laws equivalent to the BMR) is unlikely.  We are therefore seeking to ensure the continued use of our indices in the EU through one of the two other available routes: recognition (meaning a national competent authority acknowledges that a third country administrator meets the requirements of the BMR by reference to its compliance with the IOSCO Principles) or endorsement (meaning a national competent authority acknowledges that an index provided by a third country administrator meets the requirements of the BMR by reference to its compliance with the IOSCO Principles).  Our team is working closely with EU policy makers and regulators and we expect to fully comply with the BMR framework.

In fact, we have long believed that publishers of indices and benchmarks must ensure a strict separation between commercial and benchmark calculation functions.  The potential for conflicts naturally arises when an organization publishes indices as well as prices components and/or issues investment products.

S&P DJI focuses on index publication and does not engage in investment banking, equity listing, investment management, or trading.  Similarly, we do not price index components or issue investment products; we source component prices from third parties, such as regulated exchanges, and we license our indices to third-party product issuers.  Such separation of index publication from other steps in the investment product development cycle ensures transparency, independence, and objectivity.

At S&P DJI, physical and organizational firewalls separate commercial and governance operations.  Final decisions about methodologies, index constituents, index rebalancing, etc. are all made within a distinct group with no relation to and restricted communications with commercial operations.  Changes in constituents and weights are governed by objective, rules-based, and publicly available methodologies found at

Transparency is one of the most broadly accepted and valued tenets of index-based investing.  It is incumbent on all participants to ensure that benefit persists.

[1] Article 2.1 BMR

[2] Article 59 BMR

[3] Article 51 BMR

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

The Investment Opportunity in China’s “New Era”

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Vania Pang

Capital Markets and Investment Solutions, Index and Quantitative Investment

ICBC Credit Suisse Asset Management (International) Company Limited


The 19th Party Congress of China, one of the most important political events in China this year, has cemented President Xi Jinping’s position as one of the most powerful leaders in decades. His name and political ideology are enshrined in the party constitution, known as “Xi Jinping’s Thought on Socialism with Chinese Characteristics for a New Era”. A long-term economic roadmap of the country has been set in the congress for the new era.

What does “New Era” mean to equity investors?

President Xi emphasized the following in the congress that will guide the policy making by the Party over the next few years.

1. To pursue “quality” economic growth

Growth target no longer being emphasized and specified in the Party’s work report. President Xi outlined a long-term roadmap for building a prosperous, strong, democratic, culturally advanced, harmonious and beautiful China by the mid-21st century.[1]  He reiterated the government’s commitment to transitioning the economy from a high growth model to a more sustainable and high-quality development model.

2. Rebalancing of resources allocation

The principal contradiction facing Chinese society now is a tension between “people’s ever-growing needs for a better life” and “unbalanced and inadequate development”. Rebalancing of resources allocation is the key to resolve the problem. Deepening of structural and supply-side reforms become the highest priority, while pushing for a market economy could achieve better resources allocation through market guidance.

Regarding improvement on productivity, emphasis on innovation, cutting excess capacity, advancement and utilization of information technology, moving up the value chain in manufacturing and services were announced.[2]

3. “Belt and Road” initiative

Rebalancing of regional development through initiatives such as One-Belt-One-Road could increase the economic activities and investment in the middle and western part of China where the GDP and income level are far lagged behind the coastal regions.

4. To build a “Beautiful China”

The emphasis on building a “beautiful China” shows that the policy makers will focus more on environmental protection and provide more support to green industry. The Ministry of Industry and Information Technology (MIIT) recently announced that China aims to increase boost the output of advanced environmental protection equipment to 1 trillion RMB by 2020. MIIT says the government will provide more financial support to boost green manufacturing and technology innovation.[3]

How to capture the investment opportunity in the “New Era”?

The key leadership reshuffle showed that President Xi has a tightened grip on power, which may enable the government to push economic reforms further in the next 5 years.

We expect mixed ownership SOE reform and supply-side reform will continue to be carried out in old economy sectors like commodity, materials, oil & gas, electricity and chemicals. Higher operation efficiency and improved profits could be achieved. Banking and finance sector could benefit from strengthening the implementation of policy regarding deleveraging and direct finance to private sectors. The “Belt and Road” initiative and rural development are the key focus of the government and could boost the demand for infrastructure and construction materials.

For the new economy, such as consumer, advanced manufacturing could be benefited from consumption and industrial upgrade, while information technology and health care sectors could be boosted by government’s support to R&D and innovation. The determination of building a “Beautiful China” by the government would encourage the investment in green industry such as renewable energy, environmental protection equipment and electrical vehicle.

The diversified and all-inclusive S&P China 500 Index solution reflects the investment opportunity in both the old and new economy in one-click (Figure 1). For the year, the index has been performing strongly with YTD return of 39.64% (as of Oct 31, 2017).

Benefited from its diversification in markets and sectors exposure, S&P China 500 has demonstrated better risk-adjusted returns (Figure 2). During the period from 31 Dec, 2008 to 31 Oct, 2017, the S&P China 500 generated an annualized return of 12.9% and Sharpe ratio of 0.57, both are the highest among the major China indices.

[1] China Daily. Oct 19, 2017.

[2] Oct 19, 2017.

[3] Reuters. Oct 25, 2017.

The S&P China 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by ICBC Credit Suisse Asset Management (International) Co., Ltd. (ICBCCSI), © 2017 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.  S&P and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”). DOW JONES is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks together with others have been licensed to S&P Dow Jones Indices LLC. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively “S&P Dow Jones Indices”) do not have the necessary licenses. All information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past performance of an index is not a guarantee of future results. Neither S&P Dow Jones Indices LLC, Dow Jones, S&P, and their respective affiliates (“S&P Dow Jones Indices”) nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
In this document, ICBC Credit Suisse refers to ICBC Credit Suisse Asset Management Company Limited and its subsidiary, ICBC Credit Suisse Asset Management (International) Company Limited (“ICBCCSI”). ICBCCSI is a regulated entity under the Hong Kong Securities and Futures Commission.
No account has been taken of any person’s investment objectives, financial situation or particular needs when preparing this document. This is not an offer to buy or sell, or a solicitation or incitement of offer to buy or sell, any particular security, strategy, investment product or services nor does this constitute investment advice or recommendation.
The views and opinions expressed in this document, which are subject to change without notice, are those of S&P Dow Jones Indices LLC, ICBC Credit Suisse and/or its affiliated companies at the time of publication. While S&P Dow Jones Indices LLC, ICBC Credit Suisse and/or its affiliated companies (collectively as “we” or “us”) believe that the information is correct at the date of this presentation, no warranty of representation is given to this effect and no responsibility can be accepted by us to any intermediaries or end users for any action taken on the basis of this information. Some of the information contained herein including any expression of opinion or forecast has been obtained from or is based on sources believed by us to be reliable as at the date it is made, but is not guaranteed and we do not warrant nor do we accept liability as to adequacy, accuracy, reliability or completeness of such information.  The information is given on the understanding that any person who acts upon it or otherwise changes his or her position in reliance thereon does so entirely at his or her own risk without liability on our part.
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The S&P China 500 was launched on August 28, 2015. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index methodology details are available at Please read S&P Dow Jones Indices LLC’s DISCLAIMERS.

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

Commodities: Five Potential Sources of Return

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Marya Alsati

Product Manager, Commodities, Home Prices, and Real Assets

S&P Dow Jones Indices


Market participants have historically invested in commodity futures-based indices for their inflation protection and diversification benefits, given their low correlation to stocks and bonds. However, the returns earned from investing in commodities differ from those earned from traditional asset classes, in that commodities have no expected book value or expected cash flow, while a commodities’ value comes from the fact that they are consumable (like grains) or transformable (like petroleum) assets.

Physical commodities may be accessed through the cash spot market, but storage is costly and difficult.  Natural gas, for example, is expensive to store and to transport since it has to be maintained in liquid form at sub-zero temperatures.  Metals tend not to deteriorate over time, whereas grains and livestock do.  Gold is costly to store because it requires expensive security.

Investing in commodities indices that are constructed using long or short positions in futures on physical commodities whose value is determined based on the price of the underlying physical commodity plus yield and that trade on public markets that provide adequate liquidity and transparency, with negligible costs and no storage deterioration risk, offer a practical method to gaining commodities exposure and can provide a means for market participants to access the five components of the returns of the asset class.

So what are the five, generally accepted[1] components of returns in the commodities futures market?

The first is the insurance risk premium, which stems from the fact that producers of goods for public consumption (such as coffee, base metals, and petroleum), as well as the producers of these raw materials, wish to transfer the risk of price fluctuations to speculators, which in most cases are financial institutions.

The second is collateralization, since investment in commodities futures requires an initial margin, which is a small amount of cash that is calculated as a percentage of the notional amount of the commodity; fully collateralized versions are known as total return indices.

The third component is the convenience yield, which is the implied return on inventories and is regarded as the additional payment a commodity producer is willing to pay for the necessary raw material to ensure this input is available in a timely manner, in order to avoid delays or disruptions in production.

The fourth component is expectational variance, which is caused by unexpected inflation (supply-side shocks such as shortages) that results in sudden spikes in the price of a commodity.

The fifth component is rebalancing or roll return.  The roll return is the difference in the price of the expiring contract and the next eligible contract.  Futures contracts expire on a regular basis, generally monthly or quarterly.  Futures-based indices must roll their long (or short position) into the next contract to maintain their exposure.

[1]  Robert J. Greer, The Nature of Commodity Index Returns, The Journal of Alternative Investments, Summer 2000 and Calude V. Erb and Campbell Harvey, The Strategic and Tactical Value of Commodity Futures, Financial Analysts Journal, Volume 62, Number 2, 2006.

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