Indexology^® Blog

How can indices help retirees achieve retirement income goals? Nobel Laureate and Resident Scientist at Dimensional Fund Advisors, Dr. Robert Merton joins S&P DJI’s Dan Draper and Aye Soe for a deep dive into the U.S. retirement ecosystem.

S&P Dow Jones Indices launched the S&P Cryptocurrency Indices in May. The indices have shown historically high annualized returns accompanied by significant volatility and downside risk. One of the goals of indexing is to bring accessibility and transparency to markets, and we believe that launching indices with a trusted price provider, Lukka, has allowed market participants to understand the relative growth of various cryptocurrencies, and the overall cryptocurrency market, over time. Our entrance into the market reflects our perception that the asset class is gathering broad appeal among market participants. According to a recent study by Fidelity, 70% of all institutional investors surveyed had a neutral-to-positive perception of digital assets.¹ And as broad appeal increases, we believe the market and its surrounding ecosystem will continue to grow in size and complexity.

Our recently published paper, “Bringing Transparency to an Emerging Asset Class: S&P Cryptocurrency Indices,” takes a deeper look at several issues to highlight some key features of this growing market.

Rapid growth of the asset class. One indicator of rapid growth is the number of eligible constituents for the S&P Cryptocurrency Broad Digital Market (BDM) Index. Exhibit 1 illustrates the number of constituents and market cap of the S&P Cryptocurrency BDM Index. This growth in constituents is largely driven by increased market cap (defined by coin supply x price) of many coins beyond Bitcoin and Ethereum. As measured by back-tested data, the number of coins meeting these criteria has grown over the years, especially over the period from March-June 2021. As of Sept. 21, 2021, there were 240 coins that met the minimum requirements to be eligible for the S&P Cryptocurrency BDM Index.

Asset-level characteristics. Cryptocurrencies are not identical in terms of what they offer. Many coins have features that provide utility beyond being a store of value. In general, a number of coins may be used to pay fees on a platform or network and given out as rewards for the operation of a network. These features, in addition to potential momentum created by investor interest, may add to their value as an asset. While these coins are not equity, holding them may allow a user to participate in the growth of a platform. Many coins perform non-financial functions as well—including governance, storage, infrastructure, gaming, and more. An analysis of the correlations among coins within the S&P Cryptocurrency LargeCap Index in the report showed a varied range, affirming our discussion that coins have different profiles.

Correlation. There is currently a low correlation between the S&P Cryptocurrency Indices and other asset classes, as shown in Exhibit 2. This low correlation can help provide strategies for diversification—an important consideration, as investors consider adding cryptocurrency exposure to their portfolios. In addition, Exhibit 2 shows that the S&P Ethereum Index has a lower correlation to other indices in the S&P Cryptocurrency Series. Relationships between cryptos and other asset classes are expected to evolve as this asset class matures.

For more information on comparative performance of the S&P Cryptocurrency Indices with traditional assets, liquidity of the index constituents, rolling correlations, and more, see our report “Bringing Transparency to an Emerging Asset Class: S&P Cryptocurrency Indices”.

Learn more about the S&P Cryptocurrency Index methodology here.

¹ THE INSTITUTIONAL INVESTOR DIGITAL ASSETS STUDY, Fidelity Digital Assets, September 2021.  https://www.fidelitydigitalassets.com/bin-public/060_www_fidelity_com/documents/FDAS/2021-digital-asset-study.pdf

How do the philanthropic efforts of public companies impact returns? S&P DJI’s Michael Mell explores a custom index designed to track the 50 most generous companies with Earl Bridges, CEO of Uncommon Giving and Claire Gaudiani, Board Member at Uncommon Investment Funds Trust and author of The Greater Good: How Philanthropy Drives the American Economy and Can Save Capitalism.

How can indices bring greater transparency to climate risk? Designed to go beyond the requirements of EU Low Carbon Benchmark minimum standards, the  S&P Paris-Aligned & Climate Transition Indices were created to help market participants looking to chart a path to net zero by 2050.

The S&P China 500 declined 10.5% during Q3 2021, succumbing to dramatic losses across consumer- and technology-driven companies. Performance also continued to lag the broader S&P Emerging BMI and S&P Developed BMI, which fell 6.2% and 0.4%, respectively.

China’s Underperformance versus Regional Peers

The index likewise trailed regional benchmarks YTD—the S&P China 500 was down 7.3%, while the S&P Hong Kong BMI declined slightly (down 1.8% YTD) and the S&P Taiwan BMI (up 18.4% YTD) and S&P India BMI (up 31.1% YTD) enjoyed robust gains.

Exposure to China-domiciled technology- and consumer-related sectors also contributed to the underperformance, as recent regulations and new listing requirements took hold. Broader emerging markets, meanwhile, tend to be dominated by more traditional sectors including Financials, Energy, and Materials, which lent support to returns.

Onshore stocks outperformed offshore listings YTD, as the S&P China A BMI gained 3.0%, compared with the S&P China ex-A Share BMI, which sank 18.4%. Given its diversified composition across all Chinese share classes and sectors, the S&P China 500 posted performance ahead of most major Chinese equity benchmarks, while somewhat lagging onshore-only indices YTD.

Sector Performance Favored Energy and Materials while Consumer and Info Tech Fell

Four of 11 sectors finished the quarter in positive territory, led by Utilities (up 21.1%) and followed by Energy (up 16.6%), as renewable energy companies surged on a shift in economic policy, and general increases for energy—from any source—coincided with global supply shortages. Meanwhile, declines in Information Technology (down 9.1%) and Consumer Discretionary (down 23.4%)—which together represent nearly one-third of the S&P China 500—contributed to over one-half of the index performance during the quarter.

Consumer-driven tech companies had the greatest negative impact on quarterly performance, as the performance of Alibaba (down 34.7%), Tencent (down 21.2%), Meituan (down 23.2%), NIO (down 33.0%), and Wuliangye Yibin (down 26.4%) affected the index heavily, together contributing over one-half of the overall index declines during the period.

Other notable themes included a surge in rare-earth mining companies—who supply to chip makers—which lifted Materials (up 32.5%), while the precipitous decline of property company Evergrande (down 71.0%) drove the narrative for Real Estate (down 9.5%) and reverberated throughout the economy.

Price Declines Led to More Favorable Valuation Metrics

The S&P China 500 trailing P/E reduced noticeably to 15.8x in Q3 (18.7x in the prior quarter), as prices declined, making for the third straight quarterly decline (20.5x for Q4 2020), nearing the 10-year average of 14.2x. Meanwhile, the rolling one-, three-, and five-year P/E ratios remained elevated compared with the longer-term average. The broad-based S&P Emerging BMI trailing P/E remained slightly more elevated in comparison, at 16.2x at the quarter’s end (20.5x prior). The S&P China 500 dividend yield, meanwhile, increased from 1.51% to 1.69% on a quarterly basis.