Indexology^® Blog

By now, the news in early November about the collapse of FTX, one of the largest global cryptocurrency exchanges, is sinking in. At S&P Dow Jones Indices, we often discuss the challenges of the cryptocurrency ecosystem and its risks across multiple dimensions. These include asset-level risks, technology risks, market risks and regulatory risks, as well as unknown and sizeable systemic risks. As the fate of SBF (Sam Bankman-Fried) and his FTX exchange get sorted out by the judicial system and the court of public opinion, one thing most can agree on is that they never saw this coming.

This opaque area within the crypto ecosystem could use some clarification. While the technology surrounding digital assets creates transparency—with its decentralized, secure and immutable ledgers—the surrounding ecosystem is not always transparent.

Exchanges potentially lack transparency. There are now hundreds of exchanges that trade 24/7 globally, and not all operate at the same standard; i.e. technology, governance, etc. As the FTX collapse unfolded, S&P Dow Jones Indices’ cryptocurrency price provider Lukka, quickly removed both FTX.com and FTX.US from its list of eligible exchanges.

Crypto exchanges can be divided into two categories—centralized and decentralized.

FTX, Binance and Coinbase are all examples of centralized exchanges (part of centralized finance or CeFi). Centralized exchanges (CEXes) are typically controlled by a single entity and operate using a central order book—the trades go through an intermediary; that is, the exchange.

Decentralized exchanges (DEXes), such as UniSwap or Aave, by contrast, have no intermediary—instead, they use smart contracts (pieces of software code) and an automated market maker (AMM) to execute transactions. Often, a DEX is set up as a decentralized autonomous organization (DAO), and decisions are made using governance tokens.

This brings us to the tokens associated with various exchanges. FTX created FTT¹, a token that provided its holder a discount on FTX trading fees. FTT also could be staked (locked up) for additional rewards such as lower fees and higher rebates or used as collateral for derivatives or margin positions on FTX. Similarly, Binance exchange created BNB,² a token that allowed discounts, payments and more on the BNB Chain ecosystem. (Coinbase is a publicly traded company that offers USD Coin, a stablecoin.)

By contrast, UNI³ and AAVE⁴ tokens govern their respective DEXes via on-chain governance. These token holders can propose and vote on protocol upgrades that allow it to be community led and minimize the need for trust.

All the above represent different types of exchanges and tokens, as well as different risks and values. However, they provide little transparency.

And that brings us to the role of indices. Indices bring transparency by measuring the performance of a market. Indices also provide multiple perspectives to track and potentially access a market.

The S&P Cryptocurrency Indices are no different. These indices reflect diversification, a methodology that screens index constituents on various levels, as well as an independent Index Committee, which has discretion over index decisions involving regulatory, structural or legal issues.

FTT, BNB, UNI and AAVE are all constituents of the 50-coin S&P Cryptocurrency LargeCap Index,⁵ though only BNB is greater than 1% of its makeup as of publication date. The FTX incident shines a light not only on the benefits of diversification, but also on the relative transparency of decentralized finance.

¹ https://help.ftx.com/hc/en-us/articles/360027645972-FTX-Token-FTT-FAQ

² https://www.binance.com/en/bnb

³ https://uniswap.org/governance

⁴ https://app.aave.com/governance/

⁵ S&P Dow Jones Indices, as of Nov. 18, 2022.

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When does low volatility tend to outperform and why? S&P DJI’s Craig Lazzara and Invesco’s Nick Kalivas take a closer look at low vol performance in periods of rising rates and inflation, and explore what happens to risk/return when low vol is combined with other factors.

Take a deep dive into the low volatility anomaly as S&P DJI’s Craig Lazzara explains what the anomaly is, when and why it outperforms, and the role of dispersion in identifying potential opportunities.

U.S. equities struggled again in the past three months. The last rebalance for the S&P 500^® Low Volatility Index was in August 2022 and the S&P 500 has since declined 7.0%. The S&P 500 Low Volatility Index, which has historically moderated the performance of the benchmark, lost 5.1% in the same period.

For the entirety of 2022 so far, Low Volatility’s outperformance was much more impressive, declining just 6.1% compared to a loss of 15.6% for the S&P 500. Delivering what the strategy aims at, the low volatility index achieved its 9.5% outperformance with a standard deviation of 18% versus 25% for the benchmark S&P 500.

Since August, volatility has risen for all S&P 500 sectors, with Consumer Discretionary and Energy maintaining their status as the most volatile sectors.

The latest rebalance, effective after the market close on Nov. 18, 2022, yielded just minor shifts in allocation. The two sectors that reduced their presence most significantly in the index were Real Estate and Materials, while the index focused more on Industrials and Consumer Staples. While Utilities also lost some ground, it remains the largest sector in the index. Energy stocks, which disappeared from the index in May 2020, have yet to make a reappearance.