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Chile Tilting toward Sustainability

Understanding SOFR

Copper Crashes the Energy Party in February

The S&P Systematic Global Macro Index – Trending to New Highs

Exploring the S&P/ASX All Technology Index’s Remarkable First Year

Chile Tilting toward Sustainability

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Reid Steadman

Former Managing Director, Global Head of ESG & Innovation

S&P Dow Jones Indices

When investors think of sustainability, what often comes to mind first are progressive companies headquartered in Nordic nations, France, or Switzerland—but this is a dated view. Sustainability has moved beyond these regions, particularly into emerging markets like Latin America, where, one could easily argue, improvements in environmental, social, and governance (ESG) standards matter even more. There is simply more ground to gain.

In emerging markets, however, more tools are required to help investors make informed decisions. With this need in mind, the Santiago Stock Exchange and S&P Dow Jones Indices collaborated to launch the new S&P IPSA ESG Tilted Index to set the standard for sustainable investing for the Chilean equity market.

Defining a Sustainable Benchmark

The S&P IPSA ESG Tilted Index is a modern sustainable benchmark. ESG indices created in the early days of the sustainable investing movement tended to be narrow, focusing on the best ESG companies or a single theme, such as clean energy. Newer ESG benchmarks have forged a new path, still incorporating strict ESG criteria, but doing so in a way that retains a broad set of companies, which tends to result in less volatile, more benchmark-like returns. The S&P IPSA ESG Tilted Index fits this new mold.

The tilting of the parent index, the S&P IPSA, toward more sustainable companies is the defining characteristic of the index and ultimately drives improvements in sustainability. However, before this key adjustment, some basic exclusions are made in line with international norms.

First, companies are excluded that breach revenue thresholds related to business activities commonly viewed as undesirable by sustainable investors around the world. This includes meaningful involvement in controversial weapons (such as nuclear or chemical weapons), tobacco, coal extraction, or generating coal-powered electricity. Further, companies are excluded that are deemed non-compliant with the United Nations Global Compact due to violations related to human rights, corruption, labor rights, and the environment.

After these exclusions are implemented, constituents are tilted according to their S&P DJI ESG Scores, a holistic measure of sustainability based on the S&P Global Corporate Sustainability Assessment (CSA). The methodology spells this process out in detail, but in summary, companies are standardized within their industry groups by their S&P DJI ESG Scores and assigned a “tilt score.” The company’s original weight in the S&P IPSA is multiplied by this tilt score to achieve its new weight in the S&P IPSA ESG Tilted Index.

The S&P IPSA ESG Tilted index is superior from the perspective of the S&P ESG Scores, improving 4.4 points relative to the benchmark index. This is achieved by a reallocation of weights, which can be seen by reviewing the weights of the top five constituents of the S&P IPSA and its new ESG counterpart (see Exhibit 1).

Though improvements in composite S&P DJI ESG Scores are interesting to some, it’s difficult for many to get their minds around what this practically means. Reviewing the various topics of the CSA helps. Companies that score better tend to be stronger in their communication of codes of business conduct, enforcing these codes, and monitoring their impact on the environment and proactively managing their emissions, among many other ways. The S&P IPSA ESG Tilted Index increases the weights of companies that operate with sustainability in mind.

And after all these adjustments, how has the index performed? It has provided benchmark-like returns, in line with the S&P IPSA (see Exhibit 2). This can give investors comfort that this is an index with mainstream characteristics in line with their needs.

How will the S&P IPSA ESG Tilted Index help the Chilean market advance in sustainability-focused investing? Like no index before, it has the potential to connect investors concerned about sustainability with the corporate market. As companies see investors use this index more and more, they will likely seek to improve their ESG performance—as defined by the S&P DJI ESG Scores and CSA—and seek to do better not just for shareholders, but for the broad set of stakeholders affected by their businesses.

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

Understanding SOFR

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Hong Xie

Former Senior Director, Global Research & Design

S&P Dow Jones Indices

In June 2023, the U.S. dollar London Inter-Bank Offered Rate (LIBOR) will likely be discontinued. The Alternative Reference Rates Committee has identified the Secured Overnight Funding Rate (SOFR) as the recommended alternative reference rate to replace USD LIBOR. SOFR is calculated as a volume-weighted median of transaction-level U.S. Treasury repurchase agreements data, reflecting borrowing cost in overnight borrowing collateralized by U.S. Treasury securities.

There are three major differences between SOFR and USD LIBOR.

  1. SOFR is based on observable transactions in the largest rates market in the world at a given maturity. Since SOFR’s first publication in April 2018, the daily average volume of trades underlying it is about USD 977 billion (see Exhibit 1). In comparison, the Fed estimates that on a typical day, there are a handful of transactions worth a few hundred million dollars at most that underpin total seven tenors of USD LIBOR in the term unsecured bank funding market (Held, 2019).1 In fact, diminishing transactions underlying LIBOR is one of the main reasons that authorities are pushing the financial industry to transition away from LIBOR to more robust reference rates that are based on observable transactions rather than estimates.
  2. SOFR is an overnight rate and USD LIBOR includes seven tenors of forward-looking term rates.
  3. SOFR is nearly risk free as an overnight secured rate collateralized with U.S. Treasury bonds, while LIBOR is credit sensitive and embeds a bank credit risk premium.

Points 2 and 3 particularly make the transition from LIBOR to SOFR challenging.

One difficulty is that in the absence of SOFR-based term rates, SOFR compounded in arrears currently is the preferred replacement rate in many products. Calculated over the current interest period, it leaves little notice time before payment and poses significant operation disadvantages for some cash products (e.g., syndicated loans). A solution for this challenge would be to develop SOFR-based term rates, which are expected in the first half of 2021. However, the robustness of such rates would depend on the liquidity of relevant SOFR derivatives.

A second problem is that SOFR, without a bank credit premium, is not aligned with bank funding costs, and therefore opens up basis risk in banks’ asset liability management.

In many derivatives and some cash products, a compounded average SOFR is preferred to replace LIBOR, which naturally helps address the concern for the day-to-day volatility of SOFR. Exhibit 2 shows the comparison between three-month USD LIBOR and three-month compounded average SOFR since August 2014.2 The spread between them averages 0.29%, ranging between -0.78% and 0.91%.

USD LIBOR is frequently used as a cash rate in an index that has a cash investment or requires funding. Exhibit 3 compares the cumulative returns of a cash investment using SOFR with overnight and three-month LIBOR. In annualized terms, a SOFR-based cash return was lower than those based on overnight and three-month LIBOR by 0.30% and 0.02%, respectively, over the past six and a half years.

SOFR is expected to replace LIBOR in a variety of financial products as benchmark reference rates. It is imperative to understand SOFR to identify the appropriate form of SOFR for LIBOR replacement and conduct impact analysis.

1 Michael Held: SOFR and the transition from LIBOR

2 The Federal Reserve Bank of New York publishes daily historical indicative SOFR from August 2014 to March 2018. Official SOFR data starts on April 2, 2018.

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

Copper Crashes the Energy Party in February

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Jim Wiederhold

Former Director, Commodities and Real Assets

S&P Dow Jones Indices

An inflationary tide lifted almost all commodity boats in February 2021. Most constituents of the S&P GSCI rose while gold, the commodity that market participants often look to for inflation protection, lagged. The S&P GSCI rose 10.6% overall in February, with copper and energy doing most of the heavy lifting.

After a strong January, the S&P GSCI Crude Oil accelerated further in February, rising 18.1%. A combination of continued OPEC+ production compliance and a historic cold weather event in Texas, knocking out more than four million barrels per day of production, were the catalysts driving this oil price gush. The remaining energy commodities followed suit, with gains of at least 9% for the month.

The S&P GSCI Copper woke up in February to join the energy party, rising 15.6%, close to double the next-best-performing industrial metal, the S&P GSCI Aluminum. Copper inventories were depleted and remained at levels not seen since 2005. The swiftness of the decline in copper inventories was unprecedented. The ramp up in manufacturing activity continues across the world, as demonstrated by the latest strong PMI readings. The clean air push is also contributing to the rally in industrial metals. China’s upcoming NPC meeting will be a highlight, with this event likely to affect future demand, as well as the production of aluminum, the most energy-intensive metal to produce.

The S&P GSCI Gold fell 6.6% in February as safe haven assets were sold off in favor of more bullish asset classes and U.S. bond yields spiked. This was the largest monthly drop in gold prices since November 2016. The S&P GSCI Platinum rose 9.8%, breaking out to a five-year high on the back of a potential third year of global supply deficits and new market awareness of the metal’s use in hydrogen energy technologies.

The S&P GSCI Agriculture ended the month up 2.1%; soybeans and corn rallied to multi-year highs, driven by relentless buying from China as it rebuilds its hog herd following the devastation caused by African swine fever. The S&P GSCI Sugar rallied 8.8% in February, with industry forecasters further trimming sugar surplus estimates for the current and new crop years.

The livestock sector was dominated by an impressive rally in lean hogs; the S&P GSCI Lean Hogs rose 13.7%. Lean hog futures have been trending higher since mid-December 2020 due to a combination of higher wholesale prices, extreme weather events, and exports to other markets helping offset the expected decline in shipments to China.

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

The S&P Systematic Global Macro Index – Trending to New Highs

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Rupert Watts

Head of Factors and Dividends

S&P Dow Jones Indices

The S&P Systematic Global Macro Index (S&P SGMI) is a trend-following strategy that takes long or short positions in 37 constituent futures across equites, commodities, fixed income, and FX.

In 2020, the S&P SGMI did particularly well during the COVID-19-related drawdowns, finishing March up 11.3%, and closing the year at an all-time high. Thus far in 2021, the index has continued along this path, reaching new highs. As Exhibit 1 shows, the full-year 2020 return was 12.76% and the 2021 return is 11.17% YTD.

Much of the recent positive performance has come from commodities. This mostly occurred during the first quarter of 2020, when downward momentum in energy markets gathered pace, and Q4 2020 and YTD 2021, as vaccine news boosted hopes of an economic recovery and the U.S. dollar weakened.

To highlight the role that commodities played, Exhibit 2 shows the performance of two standalone subindices computed using the same methodology as the S&P SGMI. The first is the S&P Systematic Global Macro Commodities Index (S&P SGMI Commodities; the physical commodity futures component), and the second is the S&P Systematic Global Macro Financials Index (S&P SGMI Financials; the equity, fixed income, and FX components).

Notably, the performance of the S&P SGMI significantly exceeded that of its peers, the SG CTA Index and the SG Trend Index. The SG CTA Index tracks the performance of a pool of commodity trading advisors (CTAs) selected from larger managers that are open to new investment. The SG Trend Index is a subset of the SG CTA Index, and follows traders of trend-following methodologies.

As Exhibit 3 shows, the S&P SGMI outperformed the SG CTA Index and the SG Trend Index by 9.60% and 6.48%, respectively, for the full-year 2020 and by 6.92% and 4.79%, respectively, so far in 2021.

How Does the Index Work?

The S&P SMGI rebalances monthly and the methodology involves two core steps: the position direction decision and the weighting decision.

The Position Direction Decision:

The goal of the trend-following algorithm is to identify the most current, statistically relevant trend by assessing each constituent future independently, using an iterative process.

A linear regression is used to determine if the constituent future is in an upward or downward trend. If the regression slope coefficient is positive (negative), the component is deemed to be in an upward (downward) trend.

While the length of a particular trend will vary, the S&P SGMI uses the most recent period during which the trend was stable. This is determined using an iterative process that starts with a 22-day period and tests additional 5-day increments until the longest stable trend is identified using a statistical test.

The Weighting Decision:

The index allocates risk capital evenly across and within each of the sectors with the goal that no single sector or constituent drives the volatility of the index. The weights are then leveraged to meet the volatility target subject to a 3x leverage constraint.


Trend-following strategies can play an important role in client portfolios, offering diversifying return sources that may improve risk-adjusted return over the long term. As we enter the second year of the COVID-19 pandemic, it will be interesting to see if the S&P SGMI’s strong performance continues.

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

Exploring the S&P/ASX All Technology Index’s Remarkable First Year

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

As we mark the first anniversary of the S&P/ASX All Technology Index, it seemed an opportune time to look back at what can only be described as a remarkable inaugural year.

After peaking on Feb. 17, 2020—just one trading day post launch—the index plunged nearly 50% over the ensuing month, bottoming out on March 23 at the height of the pandemic-led selloff. Around this time, however, investors realized that Australia’s technology-driven companies were likely to be less affected by—and may even benefit from—the pandemic-related economic and social dislocations. By July 2, the index had fully retraced its losses, jumping 90% in just over three months. As of Feb. 14, 2021, the S&P/ASX All Technology Index gained 41% in the one-year period since its launch, powered by a 163% increase since the March low. In comparison, the tech-heavy U.S. Nasdaq 100 Index gained a comparatively small 25% in AUD terms and the S&P/ASX 200 had not yet returned to its pre-pandemic level.

As depicted in Exhibit 2, Afterpay accounted for more than three-quarters of the S&P/ASX All Technology Index’s total return during its first year, as its nearly 300% price increase propelled the company to the top of the index. In fact, Afterpay is now the 12th-largest Australian company by market cap, up from number 52 a year ago. However, the strength of Australia’s technology industry extended well beyond this single high-flyer. Fellow top index holdings, Xero, NEXTDC, and Seek, each returned more than 40% over the past year. Meanwhile, online marketplace Redbubble was the index’s top performer, gaining nearly 412%.

As illustrated in Exhibit 3, the composition of the index has shifted considerably since its launch. Most notably, Afterpay’s outsized performance has pushed its weight up to 25%, well above any other company. Importantly, the S&P/ASX All Technology Index methodology includes a 25% single stock cap in order to limit the influence of any single name and improve diversification. This cap is applied at each quarterly rebalance.

Despite the extreme market volatility experienced following the introduction of the index, the Australian technology industry has thrived of late. During the past year, the S&P/ASX All Technology Index expanded from 46 to 69 constituents, while its total market cap increased by AUD 80 billion (up 78%) to AUD 182.4 billion. In total, 26 companies were added to the index over the past year, while just 3 were removed.

While the S&P/ASX Technology Index will likely have a tough time surpassing the excitement experienced during its first year, it will no doubt continue to provide meaningful insights into this dynamic segment of Australia’s equity market for years to come.

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