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Iron Ore Is on a Hot Roll

Why Facebook Was Dropped from the S&P 500® ESG Index

Four Decades of the Low Volatility Factor

How Does Factor-Based Investing Work in the China A Market?

JPX/S&P CAPEX & Human Capital Index: Linking CAPEX and Human Capital to Investment Opportunity

Iron Ore Is on a Hot Roll

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Jim Wiederhold

Former Director, Commodities and Real Assets

S&P Dow Jones Indices

The S&P GSCI Iron Ore has been on a tear this year, up 72.47% YTD as of June 13, 2019, breaking through the previous high from May 22, 2019. It had by far the best YTD performance out of any of the commodities indices in the S&P GSCI Series. This bullish performance during the first half of 2019 is a good example of how using commodities in a tactical way can boost returns for investors. The S&P GSCI Iron Ore was able to distance itself from other metals. For example, the S&P GSCI Industrial Metals was flat over the same period.

Prior to the recent rally, the S&P GSCI Iron Ore was relatively range bound for two years due to competing macro themes. There are several factors to point to when explaining the recent YTD performance. First, the challenging risk-off environment in Q4 2018 left most assets finishing the year in the red. This allowed for neutral-to-bearish investor positioning entering 2019, especially for those commodities with a high beta to global markets and specifically to Chinese economic activity.

Second, to ease the burden of U.S. tariffs and to support the slowing economy, Beijing announced a variety of stimulus measures focused on boosting its industrial complex. China currently purchases approximately two-thirds of seaborne iron ore. As has been seen in the last few years with each China hard landing or global growth scare, the People’s Bank of China has not hesitated to turn on its most-adored stimulus levers. Those levers have historically been ways to increase funding for construction and infrastructure projects. While the planned move away from manufacturing to a more consumer-based economy continues to creep along in China, it will likely take a long time to implement this plan, and the Chinese administration appreciates that the current most effective way to support economic growth remains via these industrial support levers. The S&P GSCI Iron Ore is highly correlated to Chinese economic indicators such as real estate investment, industrial production, and steel production. Several of these indicators spiked in Q1 2019 just as iron ore prices started to rise (see Exhibit 2). It is worth noting that the most recent industrial production number dropped to a five-year low of 5%.

Third and most important, supply has been drastically curtailed in recent months. Inventories held globally have been reduced and are on pace to fall to five-year lows within the next few months. The Vale dam collapse in Brazil in late January 2019 and a cyclone in Australia in March 2019 reduced supply from the world’s two largest iron ore exporters. Shipments from Australia have largely returned to normal, but it is likely that Brazilian iron ore exports will be constrained for an extended period of time. Imported iron ore stock at Chinese ports fell to a 2.5 year low of 121.6mm metric tons in mid-June 2019 according to Steelhome.

The iron ore market has a number of characteristics that make it distinctive as an investable asset, but these characteristics are relatively common among commodities; iron ore supply is concentrated in a handful of geographic regions and controlled by a small number of players, and demand is dictated by one major end-user (China). Both supply and demand are subject to shocks caused by geopolitical events, unforeseen natural disasters, and policy decisions, as well as the actions of individual asset owners. However, with unique characteristics can come unique tactical investment opportunities for investors.

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

Why Facebook Was Dropped from the S&P 500® ESG Index

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Reid Steadman

Former Managing Director, Global Head of ESG & Innovation

S&P Dow Jones Indices

When the S&P 500 ESG (Environmental, Social, and Governance) Index underwent its annual rebalance after markets closed on April 30, 2019, several notable companies were removed, including Wells Fargo, Oracle, and IBM. However, the largest component to be dropped was Facebook.

A day before its exclusion, Facebook held a weight of 2.5% in the S&P 500 ESG Index. At that time, Facebook was the fourth-largest company in the S&P 500, the parent index for the S&P 500 ESG Index, with a weight of 1.9%.

Why was Facebook removed? To better understand, a primer on the S&P ESG Index Series methodology[1] is helpful.

Some ESG indices, like the Dow Jones Sustainability Indices,[2] are narrow in their construction, selecting only a few leading companies in sustainability, industry by industry. Other ESG indices, such as the S&P 500 ESG Index, keep broad exposure but exclude companies lagging in ESG performance or that are involved in certain business activities, such as the production of tobacco or controversial weapons.

To keep alignment with the S&P 500 and to exclude companies underperforming in ESG, companies are ranked within their S&P 500 GICS® industry groups by their S&P DJI ESG Scores. They are then selected, highest to lowest, with the aim of getting as close as possible to a market capitalization threshold of 75% within each industry group.

In the case of Facebook, its overall S&P DJI ESG Score was 21, out of a range of 0 to 100, with 100 being best. This low score resulted in Facebook not being selected as part of the approximately 75% of the Media & Entertainment industry group’s market capitalization included in the S&P 500 ESG Index.

Drilling down further, though its environmental score was strong at 82, this sub-score only carried a 21% weight in determining its aggregate ESG score, as environmental issues tend to be less material for tech companies. More impactful were its social and governance sub-scores, which registered at 22 and 6, respectively. These scores carried weights of 27% and 52%, respectively.

The specific issues resulting in these scores had to do with various privacy concerns, including a lack of transparency as to why Facebook collects and shares certain user information. According to SAM, a unit of RobecoSAM, S&P Dow Jones Indices’ collaborator on the S&P 500 ESG Index, its “Media and Stakeholder (MSA) analysis found that Facebook had experienced many privacy issues over the past 24 months, including allowing more than 150 companies access to more users’ personal data than it had disclosed, misuse of personal information (e.g., Cambridge Analytica) and hacking of almost 50 million accounts. These events have created uncertainty about Facebook’s diligence regarding privacy protection, and the effectiveness of the company risk management processes and how the company enforces them. These issues caused the company to lag behind its peers in terms of ESG performance.”

The good news for Facebook and other members of the S&P 500 is that the composition of the S&P 500 ESG Index is reasonably fluid, rebalancing annually. However, the S&P DJI ESG Scores are relative measures.[3] As Facebook’s peers raise the bar in their ESG performance, Facebook will need to do even more to rejoin the ranks of the S&P 500 ESG Index.

[1]   Please see the S&P ESG Index Series Methodology.

[2]   Please see the Dow Jones Sustainability Indices.

[3] Please see FAQ: S&P DJI ESG Scores.




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

Four Decades of the Low Volatility Factor

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

Many financial theories are based on the idea that riskier investments should offer higher returns.  However, there is a bank of evidence – accumulated since the 1970s – showing that less volatile stocks posted higher risk-adjusted returns across a number of time horizons, regions, and market segments, historically.

S&P Dow Jones Indices produces a range of low volatility indices, which serve as benchmarks for low volatility investment strategies, globally.  And as we have shown again and again, low volatility indices have offered upside participation and downside protection, historically.  We recently extended the returns history for the S&P 500 Low Volatility Index back to February 1972, giving us nearly five decades of insight into the factor’s performance and characteristics.  Here are a couple of takeaways from the newly available, back-tested history extension.

Low volatility outperformed in both absolute terms and on a risk-adjusted basis.

Exhibit 1 shows that S&P 500 Low Volatility Index outperformed the U.S. equity benchmark between February 1972 and November 1990, both in absolute terms and on a risk-adjusted basis.  Its higher annualized returns and lower volatility than the S&P 500 resulted in a risk/reward ratio of 0.98, which was similar to the ratio observed during the latter period.  Hence, the S&P 500 Low Volatility’s returns were similarly compensated for the risks being taken in the 1970s and 1980s compared to the period since December 1990.

Upside participation and downside protection were preserved.

Exhibit 2 provides a breakdown of the S&P 500 and the S&P 500 Low Volatility indices’ returns over three horizons: from February 1972 to May 2019, between February 1972 and November 1990, and between December 1990 and May 2019.  Up and down months are based on S&P 500’s monthly total returns.

While both indices posted similar average monthly total returns during the two distinct periods – before Dec. 1990 and since Dec. 1990 – the hit rates show that the low volatility index was slightly better (worse) at beating the S&P 500 during up (down) months before December 1990.  Although this contributed to the low volatility index capturing a greater proportion of S&P 500 returns in the earlier period – it typically captured around 90% of the equity benchmark’s monthly gains and 65% of the S&P 500’s monthly declines – the S&P 500 Low Volatility index still offered upside participation and downside protection.

As a result, the key characteristics of low volatility indices remained intact over the four decades of (back-tested) index history: the S&P 500 Low Volatility Index displayed its usual asymmetric risk/return characteristics of upside participation and downside protection.  Given these characteristics helped the low volatility index to outperform the broad-based market benchmark, the history extension provides further evidence of the potential advantage of focusing on the least volatile constituents in a given market.





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

How Does Factor-Based Investing Work in the China A Market?

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Liyu Zeng

Director, Global Research & Design

S&P Dow Jones Indices

Factor-based investing has gained popularity in the global investment community. While the long-term risk premia of factors have been evidenced in developed equity markets, some believe the inefficiencies in emerging markets could create better opportunities for factor-based investing.

In our recently published paper, “How Smart Beta Strategies Work in the Chinese Market,” we examined the effectiveness of six well-known equity risk factors—size, value, low volatility, momentum, quality, and dividend—in the China A-share market from July 31, 2006, to Nov. 30, 2018. To reflect the latest market changes, we updated the performance of factor quintile portfolios through April 30, 2019, and observed similar performance across different factors. As shown in Exhibit 1, all factors examined generated positive absolute and risk-adjusted return spreads between their top and bottom quintile portfolios in the China A-share market. Among the six factors, low volatility, value, and small cap were the best-performing factors over the period in absolute and risk-adjusted terms.

Passive investing is a common way to implement factor strategies. Factor indices are usually designed with different indexing techniques such as weighting methods, rebalancing buffers, and diversification constraints to calibrate different levels of factor exposure and portfolio investability.[i]

Based on the performance of the S&P China A-Share Factor Indices, all factors except momentum delivered excess returns on an absolute and risk-adjusted basis versus the broad market-cap-weighted benchmark, S&P China A BMI Domestic, (see Exhibit 2). Among various S&P China A-Share Factor Indices, the S&P China A-Share Dividend Opportunities Index and S&P China A-Share Low Volatility Index had the highest risk-adjusted returns and information ratios over the entire examined period. In contrast, the S&P China A-Share Short-Term Momentum Index failed to generate excess returns in the long run.

From a risk perspective, only the S&P China A-Share Low Volatility Index recorded lower volatility and smaller return drawdowns than the S&P China A BMI Domestic, while the S&P China A-Share Short-Term Momentum Index had the most volatile returns.

Although most of the factor indices delivered excess returns in the long run, there were periods of underperformance in the short term. As shown in Exhibit 3, the S&P China A-Share Factor Indices took turns leading and lagging between 2006 and 2019, with return spreads among the best- and worst-performing factors ranging from 12% to 124%. The distinct performance characteristics of factors were seen when we separated factor returns during up and down markets. Momentum and small-cap indices tended to have better performance in up markets, but low volatility, value, quality, and dividend indices performed better in down markets (see Exhibit 4). The distinct cyclicality of factor performance in China could be useful tools for the implementation of active views or exploited by factor-rotation strategies in an attempt to achieve better returns.

[i] All portfolio constituents are drawn from the combined universe of the S&P China A BMI Domestic and S&P China A Venture Enterprises Index, except for the S&P China A-Share Dividend Opportunities Index. To ensure investability, eligible stocks must have a float-adjusted market capitalization no less than RMB 1 billion and a three-month average daily value traded not below RMB 20 million. The S&P China A-Share Enhanced Value Index, S&P China A-Share Short-Term Momentum Index, and S&P China A-Share Quality Index include the 100 stocks with the highest factor scores, and the stocks are weighted by their score-tilted market cap, subject to security and sector constraints. The S&P China A-Share Low Volatility Index includes the 100 stocks with the lowest realized return volatility, and the stocks are weighted by the inverse of volatility. The S&P China A-Share Dividend Opportunities Index includes the 100 stocks from the S&P China A Composite Index with the highest dividend yield, while meeting EPS growth criteria, with all the stocks weighted by their dividend yield. The S&P China A-Share Small Cap portfolio is a hypothetical portfolio that includes 100 stocks with the lowest float-adjust market capitalization, and stocks are weighted by float-adjust market capitalization. All indices were rebalanced semiannually apart from the S&P China A-Share Low Volatility Index, which was rebalanced quarterly.


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

JPX/S&P CAPEX & Human Capital Index: Linking CAPEX and Human Capital to Investment Opportunity

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

Human capital, physical capital, and technology have been widely recognized as a fundamental source of economic growth.[1] Dating back to the 1960s and early 1970s, when we saw a rapid increase in educated workers, facilities, and technological catch-up, Japan’s “economic miracle” emerged along with impressive GDP and per capita output growth.[2] Nowadays, these factors are the core of many countries’ policies to power their economies, including Abenomics’ three arrows. Consequently, one may infer that companies investing in capital expenditure (CAPEX), R&D, and human capital at a higher speed are more likely to generate long-term growth.

For investors, however, looking at the growth of investment in the three drivers alone is not enough. On the corporate level, companies should simultaneously be able to boost labor productivity, increase profitability, and generate returns out of those inputs. In this sense, efficiency is the key to linking these three economic drivers to investors.

The JPX/S&P CAPEX & Human Capital Index is designed to track companies that not only proactively investing in human capital, physical capital, and R&D, but also can demonstrate efficient use of those investments. The index selects the 200 companies with highest composite CAPEX and human capital scores from TOPIX constituents after passing liquidity, creditworthiness, profitability, and beta filters.[3]


The JPX/S&P CAPEX & Human Capital Index targets companies with a strong growth CAPEX and R&D expenditures. Compared with the broad market, represented by the S&P Japan BMI, the JPX/S&P CAPEX & Human Capital Index steadily maintained a higher CAPEX and R&D expense growth ratio over a five-year period (see Exhibit 1).

Meanwhile, it is crucial for a company to be financially disciplined and undertake worthwhile projects to avoid the pitfall of overinvesting and “empire-building.”[1] The index measures investment efficiency by allocating more weight to companies with a high ratio of revenue to three-year cumulative CAPEX (see Exhibit 2).

Human Capital

The JPX/S&P CAPEX & Human Capital Index utilizes RobecoSAM’s Corporate Sustainability Assessment (CSA) to evaluate three people-related areas: human capital development, talent attraction and retention, and gender equality and human rights. These areas focus on quality activities that can increase productivity, such as employee training, career planning, and equality and respect in the workplace, rather than merely counting the salaries paid to employees as a human capital investment.

The RobecoSAM CSA emphasizes the efficiency of human capital investment by giving a higher score to companies that are able to:

  • Track and report quantitative measures of its training and development programs;
  • Effectively explain the link between its development programs and the impact on its business; and
  • Quantify the economic benefits of its human capital investments and demonstrate higher economic value from these investments over time.

Additionally, companies promoting gender equality are likely to rank higher, and ways they can promote this include having a larger female share of the total workforce and working to lower the wage difference between female and male employees.

In the long run, it is reasonable to believe that companies committed to cultivating, promoting, and protecting their employees could experience higher labor productivity, which in turn, can drive better stock performance.


The JPX/S&P CAPEX & Human Capital Index outperformed the benchmark TOPIX over 1-, 3-, 5-, and 10-year time horizons in terms of absolute and risked-adjusted returns. Since its launch in 2016, the JPX/S&P CAPEX & Human Capital Index has outperformed the benchmark by 0.86%.

[1] Tang, K (2015). “Considering Capex Efficiency.” S&P Dow Jones Indices.

[1]   Solow, R. M. (1956). A contribution to the theory of economic growth. The quarterly journal of economics, 70(1), 65-94.

[2]   Krugman, P. (1994). The myth of Asia’s miracle. Foreign affairs, 62-78.

[3]   For index construction rules, please refer to the index methodology:

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