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Tokens, Tokenized Funds, and the Evolution of Financial Markets

No Easy Answer: Sector and Factor Responses to U.S. Rate Hikes

S&P DJI Celebrates International Women’s Day

India's ETF Market: Examining Passive Investing's Continued Growth

Rising Rates' Repercussions

Tokens, Tokenized Funds, and the Evolution of Financial Markets

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Sharon Liebowitz

Former Head of Innovation

S&P Dow Jones Indices

When people ask me about cryptocurrencies, or digital assets more broadly, they generally ask about what’s in the news. Sometimes, it’s about a popular meme coin (e.g., Doge); other times, it’s about non-fungible tokens (NFTs) and the digital artworks that are seeing surprising prices; and still other times, it’s about the new corporate structure created in the form of a decentralized autonomous organization (DAO). It’s an exciting time for digital assets. Blockchain technology—with its security, immutability, transparency, and new way to transfer value—has spurred game-changing innovation.

What many people are less focused on, however, is how blockchain technology has also spurred innovation within the financial markets. Blockchain is leading the transformation from traditional markets to digital markets. This includes the creation of new entirely digital exchanges and the digitized assets, or tokens, that trade on them.

What is a token? A token is an asset that exists in digital form on the blockchain. It is issued on the blockchain and is a digital representation of ownership of an asset. This represented asset could be a traditional financial asset (e.g., stock, bond, gold, or real estate) or it could be a digital asset (e.g., cryptocurrency). Taking this a step further, a token can represent multiple assets in a single unit.

Interestingly, tokens are being used to represent a fund. As a tokenized fund, the token can represent all the constituents in an index in one token, similar to the way an exchange-traded fund (ETF) contains all index constituents as a single security.

The new tokenized funds bring several attributes. From a trading perspective, tokens tend to offer instant settlement, reduced counterparty risk, 24/7 trading, fractional shares, immutability, and auditability. From a market perspective, tokens may also offer global accessibility and reach new investors—including new target markets (e.g., crypto-first traders looking for an off-ramp to equity and new populations where traditional exchanges are less efficient or do not exist).

In addition, because tokens are programmable, fund operations can potentially be automated. This programmability uses smart contracts—essentially code embedded within the token itself that self-executes. Compliance features such as Know Your Customer (KYC) and Anti Money Laundering (AML), along with operational features like dividend payouts and proxy voting, can all be automated. These increases in efficiency may lead to a reduced cost structure over time.

Because they are securities, tokenized funds often trade on digital exchanges that are regulated. This has created a growth spurt in digital exchanges.

This can be seen by looking at the number of recently launched digital exchanges and products—there are a lot. For example, the SIX Digital Exchange (SDX), part of the SIX Swiss Exchange, went live in November 2021 with the issue of a tokenized bond.1 In Germany, the Boerse Stuttgart Digital Exchange (BSDEX), launched in June 2021, uses blockchain technology to trade cryptocurrencies and plans to start trading tokenized assets this year.2 In the U.S. in December 2021, a digital exchange launched the first tokenized funds tracking S&P DJI indices. And in January 2022, the U.S. SEC gave approval for the establishment of the Boston Security Token Exchange (BSTX), the first national blockchain-enabled securities exchange.3 Accenture, in a report published in June 2021,4 expects to see all exchanges fully digital by 2025.

At S&P DJI, we are excited to see our indices becoming digitized—in the format of a tokenized fund—as part of the evolution to digital markets. Currently, the digital market infrastructure stands alongside existing exchanges and asset structures. While we may debate the exact timeframe of this transformation, we are still in the early days of tokenization and digitization. We should expect to see the markets continue the move toward digital—with new regulations and additional products and exchanges transforming the financial markets as we know them.

Stay tuned to see how this journey continues!






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

No Easy Answer: Sector and Factor Responses to U.S. Rate Hikes

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Benedek Vörös

Director, Index Investment Strategy

S&P Dow Jones Indices

Although higher rates are generally seen as negative for risk assets, the initial stages of a monetary tightening cycle have not been disastrous for the U.S. stock market historically. However, while the overall market may muddle through just fine, the same may not be true for the different sectors and factors that compose a broad benchmark like the S&P 500®.

The stretch of history for which we have full data on the S&P 500’s various GICS® sectors and factor indices is around three decades long. However, the rate cycle moves slowly, with only four occasions of “liftoff” since 1994. We are presented not so much with a sample as a series of case studies. Nonetheless, history suggests a few top-level conclusions that sector- and factor-based equity investors might draw.

Turning first to sectors, Exhibit 1 shows the average excess returns of S&P 500 sectors in years when a rate hike cycle started and in other years.

Exhibit 1 suggests three distinct clusters of sectors based on their historical reaction to rate hikes.

  1. “Rate hike agnostics” – The performances of Energy, Industrials, Materials, and Consumer Discretionary were similar in years of first hikes and other years.
  2. “Rate hike underperformers” – Consumer Staples, Health Care, Financials, and Utilities underperformed the S&P 500 in the years when the Fed started raising rates. Utilities was the worst performing, confirming the sector’s “bond proxy” characteristics. Financials, which by convention is assumed to benefit from higher rates, also underperformed on average, but a look at the data reveals a major idiosyncratic event: in 1999, the S&P 500 was pulled up by Information Technology, and out-of-fashion Financials underperformed the index by 17%.
  3. “Rate hike beneficiaries” – This cohort contains Real Estate (established as a separate sector in 2016, therefore experiencing just two rate hike cycles) and Information Technology. Like Financials, Information Technology’s excess returns were greatly influenced by the 1999 dot-com bubble, during which year it outperformed the S&P 500 by 58%. If we take out 1999, the sector’s average excess return drops to just 5% in the other three calendar years when a rate hike cycle commenced.

Turning to factors, Exhibit 2 shows the average excess returns of S&P 500 factors in years when a rate hike cycle started and in other years.

In the case of factors, the “rate hike agnostic” group appears to be lacking in representatives, so we divide it into just two cohorts.

  • “Rate hike winners” – This group contains Momentum, High Beta, and Growth. All three factors’ gains can be ascribed to 1999, when they had a large tilt toward Information Technology and consequently outperformed the benchmark by 27%, 32%, and 7%, respectively. If we remove 1999 from the sample, the average excess return in the year of a first rate hike drops to 1.1%, -5.8%, and 0.5% for Momentum, High Beta, and Growth, respectively.
  • “Rate hike underperformers” – Just as for “winners,” 1999 greatly influenced this group’s excess returns. The three factors that lagged the most on average, Low Volatility, Dividend Aristocrats®, and Quality, underperformed the S&P 500 by 29%, 26%, and 14%, respectively, in 1999. Excluding 1999, both Low Volatility and Dividend Aristocrats would have outperformed the S&P 500 in the three other years in which a rate hike cycle started (by 2% and 1%, respectively), while Quality would have matched the return of the benchmark.

The overall takeaway from our analysis is that for both sectors and factors, the fact of a rate hike often played second fiddle to exogenous forces, such as a speculative bubble in dot-com stocks. While the Federal Open Market Committee’s activities are no doubt of importance to the relative returns of factors and sectors, an excessive focus on monetary policy at the expense of the broader economic and market environment could lead market participants astray when appraising prospects for the year ahead.

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

S&P DJI Celebrates International Women’s Day

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Stephanie Rowton

Director, Head of Sustainability Indices EMEA

S&P Dow Jones Indices

The theme of International Women’s Day 2022 is #breakthebias, pushing for organizations to be equitable and inclusive places of work for all. This aligns with our belief at S&P Global that an inclusive economy is one where women can fully participate in the global economy. The positive correlation between gender diversity in the workplace and corporate performance is undeniable—female representation has shown to enhance performance metrics while improving economic productivity and reducing volatility.1 Yet women remain largely underrepresented in the workforce, often due to social discrimination, lack of incentives or antiquated corporate provisions. This can result in negative financial consequences for internal and external stakeholders. Equally, strong gender and diversity integration creates an investment opportunity. The S&P Developed 100 Gender and Diversity Index seeks to track 100 developed market companies that are committed to creating a diverse and inclusive workplace free from bias and discrimination.

Female Representation Differs across Sectors

The Black Lives Matter and #metoo movements of 2020 have driven global attention toward inclusion and diversity in the workforce. Consequently, more corporations are disclosing these metrics. With increased disclosure, investors gain better insight into the divergence of female representation across sectors and regions, with popular metrics such as women on the board still showing that women remain grossly underrepresented across business.

Diversity Metrics Have Low Correlation, so Granular Data Is Essential

Promoting equality in the workplace is about more than having a policy in place. It is about creating a culture where difference is valued and bias is halted. To achieve long-term shareholder value, investors need to determine a company’s true performance across numerous indicators. This is because gender and diversity metrics have low correlation, so you need to gain insight by looking beyond the policy. Having a policy in place does not mean you have created a culture where women are integrated and accepted throughout the corporate ladder.

To understand corporate culture toward inclusion and diversity, you need to aggregate multiple sources of granular data. Leveraging the S&P Global Corporate Sustainability Assessment, the S&P DJI ESG Scores can measure company commitment to gender equality using several frameworks such as board diversity, board gender diversity, workforce gender breakdown, gender pay indicators and health and well-being. This holistic insight into a company’s values and their actions can help us calculate company performance on gender equality and create a transparent and simple scoring approach to use as the basis of our index methodology.


International Women’s Day is not just about women’s equality, it is about creating a society where diversity is accepted and building a sustainable future where no one is left behind. The S&P Developed 100 Gender and Diversity Index strives to track those companies that embody these values and are committed to diversity at all levels. As we look to #breakthebias in 2022, I am reminded of a quote from Gloria Steinem.

“The story of women’s struggle for equality belongs to no single feminist nor to any one organization but to the collective efforts of all who care about human rights.”

1 Cristian L. Deszõ and David Gaddis Ross, “‘Girl Power: Female participation in top management and firm performance,” working paper, December 2007.

Avivah Wittenberg-Cox and Alison Maitland, “Why Women Mean Business: Understanding the Emergence of Our Next Economic Revolution,” Chichester, England: John Wiley & Sons, 2008.

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

India's ETF Market: Examining Passive Investing's Continued Growth

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Koel Ghosh

Former Head of South Asia

S&P Dow Jones Indices

Market Resilience

The financial markets have been witness to numerous market cycles, trends, and crises, from the technology bubble in 2000 to the subprime housing crisis around 2007-08 and the collapse of Wall Street in 2009. 2020 brought the unexpected disruptor, coronavirus, and the ongoing pandemic changed the way markets and economies reacted. As with many disruptions, the first reaction was detrimental, with negative market reactions, as businesses were scrambling to adapt to the new environment. In March 2020, the S&P 500® dropped significantly, including its steepest one-day fall since 1987.1 It recovered from the low of 2,237.40 on March 23, 2020, to a high of 4,796.562 on Jan 3, 2022, a rise of 114%. The S&P BSE Sensex reacted similarly, with index levels falling to 25,981.24 on March 23, 2020, and a quicker recovery on Oct. 18, 2021, with a new high of 61,765.59; a rise of 138%, which has not been surpassed as of Feb. 8, 2022. Many other market indices such as the S&P Europe 350®, S&P/KRX Asia 100, S&P Japan 500, S&P/ASX 200, and S&P China 500 mimicked the recovery trend in other regions, showing the resilience of global financial markets and their ability to recover while adapting to new conditions.

The Shift to Passive

Investing styles and strategies are adapting to the new market, economic, and political dynamics that are compelling portfolio managers to review their objectives and goals. The growth in passive adoption is evident, with global assets under management having surpassed USD10 trillion and over 9,800 products as of December 2021.3 India also experienced a significant shift from being almost a purely active market, with minimal concentrated passive interest, to a boom in passive assets and number of passive products. With assets exceeding USD 50 billion and over 100 products,4 India’s growth in passive investment has ushered in new investor interest for diverse offerings.

The Active versus Passive Debate – Tilting the Scales

The debate of active versus passive has been ongoing. The recurring feature of benchmark outperformance is contributing to the adoption and growth of the passive investment space.

The S&P Indices Versus Active (SPIVA®) scorecard, which reflects on the trends of active fund management vis à vis benchmarks, has been a testament to the argument favoring indexing, as the statistics seem to tilt the balance in its favor. According to our SPIVA India Mid-Year 2021 Scorecard, over 86% of active Indian equity large-cap managers were beaten by the S&P BSE 100 over the previous 12-month period, and the numbers were similar for a three- or five-year horizon, with underperformance rates of 87% and 83%, respectively (see Exhibits 1 and 2). The index outperformance in large caps has been a recurring feature over the past few years. A new trend for the mid-/small-cap segment was a surprise for the market. Over the one-year period, 57% of active fund managers underperformed the S&P BSE 400 MidSmallCap Index, and the number was as high as 69% over the five-year horizon. This marks the beginning of opportunities for passive funds in this segment for India.

In a market that has had participants and product providers showcasing alpha in active portfolios for a long time, there is beginning to be an increased awareness on the merits of including indexing in investment strategies.

These SPIVA results are not unique to India, as similar results have been reflected over the one-year period across the SPIVA scorecards. Besides India, SPIVA is also published across another 10 markets, namely the U.S., Canada, Mexico, Brazil, Chile, Europe, MENA, South Africa, Japan, and Australia.


2 Its highest level as of Feb. 8, 2022.


4 ETFGI report as of September 2021.

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

Rising Rates' Repercussions

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Fei Mei Chan

Former Director, Core Product Management

S&P Dow Jones Indices

Which of the figures in Exhibit 1 belong together?

Even if puzzles aren’t your strong suit, it’s not hard to observe that A and C are similar, as are B and D. A and C are not like B and D.

Exhibit 1’s puzzle is rooted in recent economic news, specifically in the consensus view that high inflation will lead to a sustained rise in interest rates. Whenever the prospect of rising rates looms, there is understandable concern over the reaction of the equity market. Conventional wisdom has been that rising interest rates should be bad for the stock market. But recent history has shown that that’s not necessarily the case. From 1991 through 2021, there have been 156 months when the 10-Year U.S. Treasury Yield rose. Of these, the S&P 500® gained in 115 (74%) of the months and declined in 41—i.e., in a rising rate environment, the market was more than twice as likely to do well as badly. The common belief that there is an inverse relationship between interest rates and equity market performance is no longer a sure thing.

By extension, the question of rising rates’ impact on factor indices also arises. Circling back to Exhibit 1, here’s the same graph, this time with some labels.

Consider the first grouping of three bars. These data tell us that in months when interest rates fell and the equity market also fell, the S&P 500 declined by an average of 3.8%%. The average outperformance of the S&P 500 Low Volatility Index was 2.3% in those months, while the average underperformance of the S&P 500 High Beta Index was 4.0%.

For strategies that are explicitly risk attenuators (like Low Volatility) or risk amplifiers (like High Beta), the condition of the equity market is much more important than the state of the bond market. For example, Low Volatility tends to outperform in bad markets while lagging in good markets, and High Beta tends to exhibit the opposite pattern of returns, regardless of whether interest rates are rising or falling.

As Exhibit 2 shows, the average return spreads of Low Volatility were positive in the months when the S&P 500 was down and negative in the months when the S&P 500 was up—and vice versa for High Beta. This dependency on the broader equity market was consistent regardless of the direction of the bond market.

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