Indexology^® Blog

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.

In April 2021, the S&P Global Clean Energy Index underwent changes to reduce constituent concentration, ease liquidity limitations, and improve index replication. The total number of constituents rose, and the weighting scheme was modified. As a provider of choice, S&P DJI also launched a focused index, the S&P Global Clean Energy Select Index, which consists of the top 30 clean-energy-related stocks derived from the broader S&P Global Clean Energy Index.

As part of the initial consultation in March 2021, the Index Committee proposed a follow up consultation for further enhancements to the index methodology. This was issued on Aug. 20, 2021, and the results were announced on Sept. 21, 2021. The confirmed changes are intended to improve transparency, enhance diversification, further reduce the index’s carbon footprint, and align the index methodology with market trends and sustainable investing norms.

October 2021 Rebalance Incorporates Part of the Announced Changes

Except for the inclusion of emerging markets-listed companies to increase diversification, all changes took effect after close on Oct. 15, 2021, coinciding with the semiannual review for the S&P Global Clean Energy Index and S&P Global Clean Energy Select Index. Exhibit 1 summarizes changes for these indices.

Improved Selection and Scoring Transparency (Effective October 2021)

A notable change in the October rebalance was the move toward a more systematic implementation of a core part of the methodology. Through the introduction of FactSet’s Revere Business Industry Classification System (RBICS) and S&P Global Trucost’s Power Generation Data, the new methodology seeks to improve transparency for selection and scoring of clean-energy-related companies. Clear thresholds have been defined, using power generation and revenue datasets, to determine a company’s involvement in clean-energy-related businesses. This is a positive step forward for the S&P Global Clean Energy Index series since its launch in 2007, as S&P DJI continues to review and adopt new capabilities to its indices.

Stricter ESG Standards (Effective October 2021)

The existing carbon screening rule was modified¹ to improve its effectiveness, thereby reducing the carbon footprint. Previously, all eligible stocks, including those with lower exposure scores (0.75 and 0.5),² were used to calculate the distribution of carbon-to-revenue footprints, which was subsequently used to determine cut-off thresholds at which companies were excluded. The revised rule states that this distribution will now be determined only by companies in the preliminary universe that have maximum clean energy exposure (i.e., exposure score 1). This change lowers the average and narrows the carbon footprint distribution, which in turn results in a lower and stricter cut-off threshold.

In addition to modifying the carbon screen, S&P DJI announced the introduction of exclusion criteria (Sustainalytics Business Activity Screenings, Sustainalytics Global Standards Screening, and Media and Stakeholder Analysis Overlay) to monitor for controversial behavior, involvement in specific business activities, and adherence to international norms and standards. The impact of these screens is shown in Exhibit 3.

Emerging Markets-Listed Stocks to Become Eligible (Effective April 2022)

While the scope of the index objective will remain the same, the consultation results confirmed the expansion to include emerging markets-listed companies. This change will only apply to the S&P Global Clean Energy Index and will take effect starting April 2022. Once effective, emerging markets could represent close to 15% of the index, and we anticipate the index target constituent count to rise to 100, based on preliminary projections. While this could be subject to change, we also expect the number of exposure score 1 stocks to rise, which would lead to a higher overall exposure to clean energy (index weighted average exposure score estimated to be 0.95).

The clean energy segment continues to be in the spotlight with increased spending on renewable power³ required to meet global climate change objectives. As this segment continues to grow, the evolution of the S&P Global Clean Energy Index Series offers a pure, liquid, and transparent exposure to clean energy.

¹    The carbon-to-revenue footprint standard score is calculated for each stock in the preliminary universe. The score is calculated by subtracting the mean carbon-to-revenue footprint of all preliminary universe stocks with an exposure score of 1 as of the rebalancing reference date from each stock’s carbon-to-revenue footprint, and then dividing the difference by the standard deviation (also determined based on preliminary universe stocks with an exposure score of 1). The top and bottom 5% are excluded from the mean and standard deviation calculations. Companies with a score greater than 3 will not be eligible for inclusion.

²    All companies in the S&P Global Clean Energy Index universe are assigned exposure scores that denote their involvement in clean-energy-related businesses. An exposure score of 1 is assigned to companies with maximum clean energy exposure, 0.75 to companies with significant clean energy exposure, 0.5 to companies with moderate clean energy exposure, and 0 to companies with no exposure.

³    Financial Times – IEA warns spending on clean energy must triple to curb climate change.