Indexology^® Blog

The Israeli stock market has a unique landscape, offering stability and liquidity comparable to other well-established markets, while also providing regional diversification as the only developed market in the Middle East. In recent years, Israel has been a spotlight for technology and innovation, hosting many high-tech companies from industries like cybersecurity, biotechnology and software development. To highlight the significance of this market, S&P Dow Jones Indices offers the S&P Israel 100 Index.

The S&P Israel 100 Index measures the performance of the 100 largest and most liquid companies listed and domiciled in the Israeli stock market. Following a float-adjusted market capitalization weighting, the index is reconstituted and rebalanced quarterly to capture market trends. To reduce overconcentration, single constituent weights are capped at 8% and single GICS sectors are capped at 30% at each rebalancing. For more details about the index construction, the methodology can be found on the S&P Dow Jones Indices website.

Launched in August 2023, the S&P Israel 100 Index is calculated in U.S. dollars and new Israeli shekels with more than 12 years of daily index level data available. The index includes all 11 GICS sectors, with Financials having the biggest market cap weight at 31.9%, followed by Information Technology (19.0%) and Real Estate (13.0%), as of the end of November 2024 (see Exhibit 2).

After a year of volatility and an accompanying modest annual return of 4.8% in 2023, 2024 YTD returns for the S&P Israel 100 Index have seen multiple all-time highs. Having returned 23.4% YTD (as of November 2024), the index has maintained a similarly positive trend as the S&P 500 (up 28.1% YTD) and the S&P World Index (up 22.4% YTD), as seen in Exhibit 3.

The main contributors to the YTD performance of the S&P Israel 100 Index vary across sectors, with Financials playing a significant role, along with Teva Pharmaceutical Industries from the Health Care sector, whose growth has been attributed to an increase in revenue from both their generic and branded drugs, as well as semiconductor manufacturers (Tower Semiconductor Ltd and Nova Ltd) from the Information Technology sector, which have been boosted by increased interest around the AI space. The top 10 contributors of the index accounted for 72.3% of its performance (see Exhibit 4).

The Tel Aviv 125 Index, also known as the TA-125 Index, is one of the most broadly used benchmarks to reflect the performance of Israeli markets. The S&P Israel 100 Index has provided a differentiated return profile compared to the TA-125 Index, while exhibiting improved performance over the most recent 10-year period.

The S&P Israel 100 Index measures Israel’s leading companies across the sector landscape. With a transparent, rules-based methodology, this index offers the possibility of geographical diversification among developed markets, given its focus on a country with unique characteristics. As the only developed market in the Middle East, the index reflects the distinct characteristics of Israel’s dynamic economy.

What’s fueling the growing interest in direct indexing? S&P DJI’s Robby Ross and Brandon Hass sit down with Erkko Etula from Brooklyn Investment Group to explore how direct indexing solutions can enable investment managers to customize leading indices like the S&P 500 to meet specific objectives.

In December 2023, the COP28 UN Climate Change Conference was hosted in Dubai, once again putting the spotlight on global climate change action and handing the Middle East hosting responsibilities. Describing the current period as “the beginning of the end” of the fossil fuel era,¹ this iteration of COP not only gave us the first global stocktake of progress against the 1.5°C by 2023 global warming target, but more specifically a unique opportunity to assess how the host region, the Middle East, stacks up in terms of both contribution to global warming and reduction of corporate carbon emissions.

Indices are a useful way to measure the performance of a basket of stocks, but they can also provide insight into the environmental credentials of listed companies. In this blog, we explore the carbon characteristics of the region via the S&P Pan Arab Composite and the S&P/Hawkamah ESG Pan Arab Index. The latter index measures the performance of the 50 top-performing stocks in the region, while incorporating environmental, social and governance (ESG) factors. The former index is a broad, float-adjusted, market-capitalization-weighted index with no specific ESG criteria incorporated, and acts as the benchmark for the ESG index.

Using S&P Global Trucost environmental data, we can assess how constituents of these indices have historically contributed to overall emissions and related metrics. This analysis enables us to explore a number of facets of climate transition. For example, which industries are the heaviest CO2 polluters? Which companies are leading the charge from a decarbonization perspective? How does the inclusion of ESG criteria in index design affect its carbon performance when compared to the benchmark?

Exhibit 1 provides us an overview of how the weighted-average carbon intensity (WACI) of the S&P Pan Arab Composite has increased over time.² One noteworthy observation here is that corporate disclosure has improved with time, with more companies providing more thorough disclosure of their carbon performance. This is combined with improved modeling techniques on non-disclosing corporates.³

With overall emissions rising, which companies are most heavily contributing? Exhibit 2 provides an overview of which stocks have the greatest WACI, meaning that based on their weight in the index, they have the highest proportional CO2 emissions.

The S&P Pan Arab Composite has more stocks, meaning weights within the index are generally smaller than in the S&P/Hawkamah Pan Arab ESG Index. As a result, although ACWA Power Co has a WACI of 839.8, its smaller index weight minimizes its contribution to the overall WACI of the S&P Pan Arab Composite. Conversely, in the S&P/Hawkamah Pan Arab ESG Index, the lower number of stocks mean that they have greater weight in the index, leading to greater concentration. As a result, the overall index-level WACI of the ESG index has historically been higher.

As depicted in Exhibit 3, due to concentration within the S&P/Hawkamah Pan Arab ESG Index, it had a greater carbon intensity than its benchmark in 2021, 2022 and 2023.

Exhibit 4 depicts the overall country-level contribution of carbon intensity of the S&P Pan Arab Composite. As of June 2024, over one-half of the emissions of the index came from Saudi Arabia, while Kuwait was the second-largest contributor, at 14% of overall index emissions. This is aligned with country representation by market capitalization.

To identify sectors that are making progress, it is possible to compare the sector-level intensity and observe which sectors have seen reductions over time. Exhibit 4 shows the Trucost Revenue Sectors that have made the most progress since December 2019.

Coal Power Generation has experienced the largest reduction in intensity over this period, driven by Taqa Morocco’s declining carbon intensity. However, overall emissions at an index level have increased, highlighting the need for corporate action on CO2 emissions.

This carbon analysis reveals that the S&P/Hawkamah ESG Pan Arab Index exhibited a higher WACI than its benchmark over the five-year period studied. While this finding highlights a notable disconnect between ESG scoring and actual carbon performance, it also emphasizes the evolving nature of ESG indices as they adapt to the complexities of sustainability metrics. While the S&P/Hawkamah ESG Pan Arab Index represents a significant step forward in promoting responsible investment practices in the region, encouraging companies to enhance their ESG performance and transparency, for those market participants seeking an improved carbon reduction at an index level, it may be the case that this should be factored into specific index design principles.

Ultimately, the S&P/Hawkamah ESG Pan Arab Index can serve as a valuable tool for assessing the ESG performance of companies within the region, as it integrates considerations for environmental, social and governance issues. As expectations on corporate sustainability proliferate, the index continues to act as a robust measurement of these crucial topics.

¹See a summary of COP28 here: https://unfccc.int/cop28/5-key-takeaways

²For more information on metric calculation please see Index Carbon Metrics Explained.

³The full methodology available at Trucost Environmental Data: Methodology.

While the S&P Dividend Aristocrats^® Indices have been in existence for almost two decades, only now has the “Aristocrats” moniker been extended to a new series: the S&P Quality FCF Aristocrats^® (Free Cash Flow Aristocrats) Indices. Like the S&P Dividend Aristocrats, this new series emphasizes consistency and the selection of high quality companies. While they share many core attributes, these two series offer differentiated exposure and track companies with distinct profiles. In this blog, we will compare these two series and explore how they can serve as complementary building blocks when paired together.

Methodology Comparison

For the purposes of this blog, we will compare the S&P High Yield Dividend Aristocrats Index (S&P HYDA Index) with the S&P 500^® Quality FCF Aristocrats Index, as both are based on a U.S. universe. The S&P HYDA Index is a dividend-focused strategy that tracks high-yielding large-, mid- and small-cap companies in the S&P Composite 1500^® that have increased their U.S. dollar dividends for a minimum of 20 consecutive years. Comparatively, the S&P 500 Quality FCF Aristocrats Index is a free cash flow-focused strategy that tracks large-cap companies with a minimum of 10 consecutive years of positive free cash flow, along with high FCF margin and FCF return on invested capital (ROIC).

Index Characteristics

While both index series emphasize consistency as a key qualifier, they differ in their exposures and the types of constituents they track. The S&P HYDA Index aims to select high quality dividend payers, tilting to both value and quality. In contrast, the S&P 500 Quality FCF Aristocrats Index focuses on companies with high and consistent free cash flow, resulting in a purer focus on quality, as free cash flow measures true profitability and is less susceptible to manipulation, with a tilt to growth. This distinction reflects the company lifecycle: S&P HYDA Index companies are typically more mature, blue-chip firms, while the S&P 500 Quality FCF Aristocrats Index often comprises earlier-stage companies that tend to reinvest their capital at high rates of return to seize growth opportunities.

From a fundamental perspective, Exhibit 3 shows that the S&P HYDA Index tends to track companies with lower valuation multiples and higher yields. In contrast, the S&P 500 Quality FCF Aristocrats Index typically exhibits higher profitability, stronger sales and earnings growth, as well as elevated returns on equity.

Performance Comparison

Both indices comfortably outperformed their respective benchmarks over the back-tested period since 2001 (see Exhibit 3), making a side-by-side comparison insightful. Notably, the S&P HYDA Index exhibited a lower upside capture ratio (0.85) but demonstrated strong defensiveness on the downside (0.76). The S&P 500 Quality FCF Aristocrats Index closely tracked the benchmark in up markets and showed moderate defensiveness on the downside, though not as robustly as the S&P HYDA Index.

Sector Comparison

From a sector perspective, these indices could be considered complementary due to their contrasting sector overweights and underweights. The S&P HYDA Index generally favors defensive sectors such as Consumer Staples and Utilities, while the S&P 500 Quality FCF Aristocrats Index has a greater weight in secular growth sectors, including Information Technology and Health Care.

Pairing the S&P HYDA Index with the S&P Quality FCF Aristocrats Index

When choosing between these two indices, market participants should align their selection with their desired outcome. The S&P HYDA Index has historically tended to have equity participation with the potential for higher dividends and strong defensive qualities. The S&P 500 Quality FCF Aristocrats Index has demonstrated market-like upside capture ratios with enhanced quality, reduced downside risk and strong risk-adjusted returns. Alternatively, combining both indices may offer the best of both worlds, historically improving overall risk-adjusted returns and smoothing the impact of regime changes.

This new series of indices, while using the Aristocrats brand, has shown differentiated exposure versus the S&P Dividend Aristocrats. Compared with the S&P HYDA Index, the S&P 500 FCF Aristocrats Index has had low constituent overlap, higher weight in secular growth sectors and a pure focus on quality. We hope this blog has clarified the positioning of these two index series, demonstrating their potential as complementary tools.

The S&P Quality FCF Aristocrats^® (Free Cash Flow Aristocrats) Indices measure companies that consistently generate robust FCF over many years. FCF, the cash remaining after a business covers its operational costs and capital investments, is crucial because it provides financial flexibility. Companies with high FCF can invest in growth opportunities, pay dividends and reduce debt, making them more resilient in fluctuating markets.

On Sept. 23, 2024, S&P Dow Jones Indices (S&P DJI) launched two indices in this new series: the S&P 500^® Quality FCF Aristocrats Index and S&P Developed Quality FCF Aristocrats Index. In this blog, we will introduce these indices by reviewing their methodology and historical performance.

Methodology Overview

These indices track companies that have a minimum of 10 consecutive years of positive FCF, along with a high FCF margin and FCF return on invested capital (ROIC). FCF margin measures how efficiently revenue is converted into FCF, while FCF ROIC measures how efficiently invested capital is utilized to generate FCF.

By concentrating on firms that excel in long-term FCF generation, this methodology aims to include only the highest-quality companies. Additionally, by prioritizing consistent and efficient FCF generation, this approach distinguishes itself from other FCF-based indices in the market, which tend to be yield-focused and exhibit a strong value tilt.

Performance Insights

When looking at back-tested historical performance, these indices outperformed their regional benchmarks, delivering higher risk-adjusted returns and lower losses during market downturns. They provided a defensive investment strategy that balanced growth potential with stability, visible through their reduced volatility and lower downside capture ratios.

Factor Tilts in S&P Quality FCF Aristocrats Indices

The S&P Quality FCF Aristocrats Indices primarily emphasize quality, including companies that typically exhibit high and consistent FCF generation. Additionally, these indices tilt toward growth since these companies can allocate excess FCF to research & development, advertising and marketing.

As Exhibit 3 shows, this approach has historically resulted in improved return on equity (ROE) and operating margins compared to their benchmark indices, showcasing a balanced strategy that prioritizes both quality and growth.

The regional S&P Quality FCF Aristocrats Indices offer a high quality, defensive approach, demonstrating outperformance versus their benchmarks with higher risk-adjusted returns and lower downside capture in falling markets, while matching the benchmark returns in rising markets over the back-tested period. Stay tuned for an upcoming blog, where we will compare the S&P Quality FCF Aristocrats Indices with the S&P Dividend Aristocrats^® Indices.