Indexology^® Blog

Except for intermittent fasting groups or keto dieters who tend to skip it, breakfast is considered by many to be the most important meal of the day. Now, there is a reliable and publicly available benchmark for the performance of the most liquid commodities typically consumed at breakfast. The S&P GSCI Dynamic Roll Breakfast (OJ 5% Capped) is a global production-weighted index offering another example of thematic ways to look at commodities allocations within portfolios. A liquidity-based allocation to orange juice (OJ) has been incorporated into the index construction, because breakfast without OJ is like a day without sunshine. With a three-year annualized total return of 20.15%, the performance has outpaced broad equities, other asset classes and even the market standard commodities benchmark, the S&P GSCI, by 5% annualized. If breakfast commodities were its own commodities sector, it would have been the second best performing over the past three years (see Exhibit 1).

The heavy agriculture weighting of the index, at roughly 90%, is the clear main driver of performance for breakfast. Not forgetting bacon, lean hogs currently have a weight of about 10% to round out the theme. Corn and wheat make up the bulk of the index, because these two breakfast commodities are by far the most produced and consumed commodities around the world; roughly two billion tons of corn and wheat are produced each year in total. The other commodities are much smaller, and this is reflected in the current percentage weights as of the end of April (see Exhibit 2).

A growing concern among central bankers regarding food inflation serves to highlight the importance of agricultural commodities to the global economy from both a societal and environmental perspective. This new index may offer a way of gaining exposure to themes such as inflation and geopolitics. The Ukraine-Russia conflict is disrupting global food and energy supplies to an unprecedented degree. A prime example is the tightening global wheat supply picture. Ukraine is considered Europe’s breadbasket and roughly one-third of global exports of wheat comes from the Ukraine/Russia region. Wheat exports out of the Black Sea have been strained over the past few months as the conflict continues. Global wheat prices have skyrocketed, and with the high weighting in the breakfast index, wheat was an important driver in the solid performance. In response to the geopolitical tensions and persistent supply chain bottlenecks, food protectionism is returning to the fore. For example, plans by India, the world’s largest exporter of sugar, to restrict exports to prevent a surge in domestic prices could put additional pressure on global sugar supplies.

Finally, the S&P GSCI Dynamic Roll Breakfast (OJ 5% Capped) employs a flexible monthly futures rolling strategy designed to alleviate the negative impact of rolling into contango and potentially limit volatility exposure to the commodities market. With its global focus, this new thematic index demonstrates our continued efforts to bring replicable and investable commodities-based benchmarks to a public audience.

Just over four months after its launch (on Nov. 8, 2021), the S&P/BVL Peru General ESG Index experienced its first annual rebalancing, effective after the market close on the last business day of April 2022.

The S&P/BVL Peru General ESG Index is the first index of its kind in the Peruvian market, measuring the performance of Peruvian companies from the headline S&P/BVL Peru General Index that meet high standards of sustainability criteria.

The Peruvian stock exchange (BVL) recognizes and rewards companies that qualify for the S&P/BVL Peru General Index by granting them a discount on BVL and Cavali fees as an incentive to improve their S&P DJI ESG Scores.

For those who are not familiar with the methodology, we summarize it in Exhibit 1.

We start by excluding from the universe (the S&P/BVL Peru General Index) what the methodology classifies as contrary to general ESG values; then we select all companies whose S&P DJI ESG Score is equal to or greater than the universe median score. The companies are then weighted according to their float-adjusted market capitalization (FMC), subject to certain concentration limits.

The index is rebalanced once per year, effective after the market close of the last business day of April, and has a reweight after the close of the last business day of October. As of the 2022 rebalance, 17 out of 29 constituents made it into the S&P/BVL Peru General ESG Index, as three new participants were added and one was removed.

The S&P DJI ESG Score of the S&P/BVL Peru General ESG Index increased from 52.68 to 62.27, an improvement of 9.58 points; considering that the maximum attainable ESG score of the S&P/BVL Peru General Index is 95.86, the ESG realized potential was 22%.

In its short existence, the performance of the S&P/BVL Peru General ESG Index exhibited different results compared to its benchmark (see Exhibit 4).

CONCLUSION

The S&P/BVL Peru General ESG Index is designed to measure the performance of securities in the S&P/BVL Peru General Index that sustainability criteria. As sustainable investment themes garner more interest, companies that incorporate ESG considerations have the potential to benefit in terms of public perception.

As the global green bond market continues to grow, how are indices helping investors assess greenium and the potential opportunity set? S&P DJI’s Brian Luke joins VanEck’s Bill Sokol and Phil Kirouac for a closer look at how indexing works for green bonds.

Try as one might, it is hard not to notice the woes of equities this year. Through May 19, 2022, the S&P 500^® has declined 18%, losing 9% in the last three months alone. This pain was felt across most sectors of the index, with only Consumer Staples, Energy, and Utilities in positive territory for the year. Exhibit 1 shows that volatility increased in every sector except Energy in the last three months.

Despite the general increase in volatility, there were clearly pockets of stability in the market, as the S&P 500 Low Volatility Index is actually flat since its last rebalance on Feb 18, 2022, down 0.7%. Exhibit 2 contrasts the performance of low volatility index with that of the S&P 500, which declined 10.0% in the same period. The low volatility index is designed to mute the gyrations of the market in both directions (which it has historically done with reasonable reliability). It should go down less when the market is down, but also go up less when the market is up. And it has certainly done what it is designed to do in the current market rout.

Effective after the market close May 20, 2022, the S&P 500 Low Volatility Index will have almost half its weight in just two sectors, Utilities (26%) and Consumer Staples (22%). As shown in Exhibit 3, the latest rebalance saw a significant increase in Utilities, Financials and Real Estate, and reductions in exposure to the Consumer Discretionary, Health Care and Technology sectors. Despite its strong performance, Energy still has no presence in the index—not a surprise since it remains the most volatile sector of the S&P 500.

Inflation in Mexico has reached levels not seen in over 20 years, as the S&P/BMV IPC has receded from its all-time high reached earlier this year (see Exhibit 1). In this environment, market participants may question how inflation may affect index performance and the effectiveness of equity allocations as a hedge against it.

First, let’s analyze how the index has performed during periods of rising inflation. Exhibit 2 shows the rolling 12-month return of the S&P/BMV IPC compared with changes in inflation represented by the National Consumer Price Index (CPI) since 2000. For periods corresponding to rising inflation, the index returns were positive 75% of the time; however, during periods of sharp increases in inflation (over 3%), this figure increased to 100%, as shown by the returns in the circle. This shows that, historically, high inflation was associated with strong performance in the Mexican equity market.

How has the S&P/BMV IPC performed relative to inflation? Have allocations to the index served as a hedge against inflation, especially during periods of high inflation?

We can see in Exhibit 3 that, excluding periods of externally driven economic turmoil (the dot-com bubble, the Great Financial Crisis of 2008, the NAFTA renegotiation in the late 2010s and the COVID-19 pandemic), the market generally outperformed inflation by a significant amount. Since 2000, the index outperformed inflation in 60% of rolling 12-month periods. Including dividends being reinvested as measured by the S&P/BMV IRT, this grew to 68%. If we look at the past 10 years, the average outperformance was 9.4% on a price return basis and 10.4% including dividends. Analyzing the entire period in Exhibit 4, the S&P/BMV IPC provided a cumulative return of 127% over inflation and 168% with reinvested dividends, as represented by the S&P/BMV IRT.

Lastly, this strong performance during rising inflation can be explained in part by the index’s composition. Consumer Staples and Materials, two sectors commonly considered to perform relatively well in inflationarity environments,¹ make up nearly 50% on average of the S&P/BMV IPC over the past 10 years (see Exhibit 5). Therefore, their contribution to the index’s total return can be significant during these periods.

In conclusion, the S&P/BMV IPC has generally performed well during periods of rising inflation, more so during sharp increases, and has provided signficant real returns above inflation over the long run.

1 Demand for Consumer Staples tend to be relatively inelastic, so these companies are typically able to pass along rising prices better than other sectors. Commodity-oriented sectors such as Materials also tend to perform well in inflationary environments, as these companies benefit from rising commodity prices.