Indexology^® Blog

Global equities ended the second quarter of the year with a gain of 6.0%, as measured by the S&P Global BMI, accumulating gains of 13.4% YTD. Shariah-compliant benchmark returns, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, outperformed their conventional counterparts by about 1.5% during the quarter, building on momentum from the first quarter of the year.

Regional broad-based Shariah and conventional equity benchmarks had a positive quarter across the board. The Shariah-complaint developed markets benchmark stood out for its performance against the conventional benchmark YTD, while the Shariah-compliant emerging markets index stood out as an exception to the performance trend and continued to lag the conventional benchmark (see Exhibit 1).

Drivers of Shariah Index Performance YTD in 2023

Shariah benchmarks continued to outperform their conventional counterparts YTD, in contrast to 2022 returns. Sector composition can provide some explanation for the results during this period. A higher exposure to Information Technology stocks within Islamic indices and no exposure to conventional financial services including banks, were the main drivers of this outperformance. The Information Technology sector was up nearly 39% and represented nearly one-third of the index weight, driving the highest return contribution among all sectors (see Exhibit 2).

Meanwhile Communication Services and Consumer Discretionary also had outsized returns among sectors, which contributed significantly to the index’s outperformance despite lower representation in comparison to the largest sectors.

Energy and Utilities were the only sectors that decreased YTD. The impact from these was limited by their small weights.

MENA Equities Turn Around in Q2 2023

Following negative performance during Q1, MENA equities gained nearly 6% during Q2, as measured by the regional S&P Pan Arab Composite. GCC country performance largely followed suit, with positive returns for Saudi Arabia (8.0%), UAE (6.3%) and Kuwait (0.1%), while Bahrain surged (13.8%). Meanwhile, Qatar (-1.3%) and Oman (-0.3%) posted losses.

For more information on how Shariah-compliant benchmarks performed in Q2 2023, read our latest Shariah Scorecard https://www.spglobal.com/spdji/en/documents/performance-reports/scorecard-sp-shariah-djim.pdf

This article was first published in IFN Volume 20 Issue 28 dated July 12, 2023.

The S&P 500^® ESG Leaders Index is constructed using securities from the S&P 500 ESG Index that meet stricter sustainability criteria, while maintaining similar overall industry group weights as the S&P 500.¹ The S&P 500 ESG Leaders Index takes its underlying index up a notch by applying additional exclusionary screenings based on business activities such as shale energy, nuclear power, alcoholic beverages and gambling.

Previously, we performed a real-world performance test for the S&P 500 ESG Index’s improved sustainability profile, after nearly four years since the index’s launch. From its launch date until the end of June 2023, the S&P 500 ESG Index outperformed its benchmark, the S&P 500, by a cumulative 13.3% (impressive in the context of a benchmark that is notoriously hard to beat). We found out that underweighting the lowest ESG-scoring constituents contributed the most to the S&P 500 ESG Index’s outperformance.

Now, taking a closer look at the S&P 500 ESG Leaders Index with its live performance data approaching 18 months since its launch, it also outperformed the S&P 500, by a cumulative 2.7%. But given the S&P 500 ESG Leaders Index is designed to meet stricter sustainability criteria than the underlying S&P 500 ESG Index, how important were higher or lower ESG-scoring constituents in generating this excess return? Were there similar patterns as the S&P 500 ESG Index’s outperformance?

To measure this, we adopted a similar approach as we did for the S&P 500 ESG Index and created hypothetical ESG “quintile portfolios,” reconstituted annually by ranking the S&P 500’s constituents by their ESG score and assigning each to one of five portfolios, from highest to lowest ESG score. The hypothetical cap-weighted performance of these portfolios was then calculated and used to create a Brinson-like² “ESG attribution,” teasing out the importance of ESG exposures in the returns of the S&P 500 ESG Leaders Index.

Exhibit 1 summarizes the results of this analysis, including the average weights of the S&P 500 ESG Leaders Index and the S&P 500 in each ESG quintile (from high to low scoring), the corresponding portfolio and index returns, as well as a summary of the corresponding allocation and selection effects over the full period.³

The allocation, selection and total effects from over- and underweighting across and within the ESG quintiles was positive in every quintile. Underweighting the lowest ESG-scoring constituents, on average, contributed 0.21% to the S&P 500 ESG Leaders Index’s outperformance. But the highest ESG-scoring constituents also contributed a significant proportion of the S&P 500 ESG Leaders Index’s relative performance. The High ESG Quintile 1 and Q2 outperformed the S&P 500 by 1.9% and 3.1%, respectively, and the S&P 500 ESG Leaders Index overweighted these quintiles by an average of 9.1% and 4.9%, respectively, leading to a total contribution of 0.34% from allocation effects to these top quintiles.

Drilling down, Exhibit 2 compares the performance of the lowest and highest ESG quintiles to the S&P 500 since the launch of the S&P 500 ESG Leaders Index and two further sub-periods. The second highest ESG-scoring quintile (Q2) outperformed consistently in 2022 and YTD in 2023. The Low ESG Quintile (Q5) underperformed by 7.8% in 2022 but outperformed by 8.1% YTD. Underweighting this quintile contributed positively to relative index performance in 2022.

Exhibits 1 and 2 together show that, in short: the S&P 500 ESG Leaders Index methodology of seeking the best-scoring constituents, as well as avoiding the worst-scoring constituents, worked in its favor overall.

Market participants sometimes consider ESG as being about avoiding the “worst.” The S&P 500 ESG Leaders Index’s outperformance since launch suggests that there may be value in following the leaders, too.

Performance drivers surely do change over time. Investors can utilize ESG-based attribution analysis such as these to gain insight and perspective as markets and conditions evolve. Similar attributions for our range of flagship indices are now available—updated as of the most recent quarter-end—in S&P DJI’s Sustainability Index Dashboard.

Register here to receive quarterly insights and performance attributions for our range of flagship sustainability and climate indices.

¹ How & Why the S&P 500 ESG Leaders Index Work

² Similar to our previous analysis with Carbon Quintiles, the quintile portfolios are each assigned an equal number of benchmark constituents, and the impact of weighting to stocks with higher or lower ESG scores is measured analogously to the way sector or country effects are measured by a traditional Brinson attribution.

³ Analysis carried out using the Portfolio Analytics tool on S&P Capital IQ Pro.

Following a poor 2022, the Information Technology sector has proven itself to be the outstanding performer in Australian equities in 2023. Despite rising interest rates, higher bond yields and weakening consumer confidence, market participants have still seen value in the Tech sector thus far in 2023. Tech’s turnaround has benefited the S&P/ASX All Technology Index, which has significantly outperformed the S&P/ASX 200 over the past 6 and 12 months.

Launched in February 2020, the S&P/ASX All Technology Index provides representation to innovative technology-oriented companies across a broad range of sectors and industries. Currently comprising 37 companies, the index provides access to not just the Information Technology sector, but also to companies in specific sub-industries within the Health Care, Consumer Discretionary,¹ Communication Services, Industrials and Financials sectors. Those sub-industries are Interactive Media & Services, Health Care Technology, Consumer Electronics, Data Processing & Outsourced Services and Transaction & Payment Processing Services.

Performance Drivers

Sector performance within the S&P/ASX 200 has been relatively clustered in 2023. The most notable outlier is the Information Technology sector, which surged ahead in Q2. Information Technology companies, along with those in Communication Services and Health Care sectors, are among the key contributors to outperformance for the S&P/ASX All Technology Index in 2023.

New Additions

Two new companies were added to the S&P/ASX All Technology Index at the latest rebalance in June: Cogstate and FINEOS Corporation. Cogstate is classified in the Health Care Technology sub-industry and is involved in combining cognitive science expertise with digital innovations through clinical trials, healthcare and research. FINEOS Corporation is a software company providing modern customer-centric core software to the employee benefits and life, accident and health industry.

¹ Note, there are currently no companies from the Consumer Electronics sub-industry of the Discretionary Sector eligible for index inclusion.

The performance of large-cap Technology stocks so far this year has been exceptional, with the S&P 500^® Information Technology sector outperforming the S&P 500 by 26% over the six-month period ending June 30, 2023—the 97^th percentile of all observations in our database. Tech’s outperformance, driven by mega-cap strength, has been especially notable because of its narrow breadth.

In this environment, concentration concerns naturally come to mind. The Herfindahl-Hirschman Index (HHI) is a widely used concentration measure; it’s defined as the sum of the squared weights of an index’s constituents. Other things equal, a higher HHI indicates an increased level of concentration, but even for completely unconcentrated equal-weight portfolios, the HHI level is inversely related to the number of names. In order to use the HHI to make comparisons within the Tech sector over time, we use an adjusted HHI, defined as the sector’s HHI divided by the HHI of an equal-weighted portfolio with the same number of stocks. A higher adjusted HHI means that a sector is becoming more concentrated, independent of the number of stocks it contains.

Tech’s current adjusted HHI level of 9.6 is in the 99^th percentile of observations, as we observe in Exhibit 1, indicating an extreme level of concentration for the sector compared to the long-term average of 4.9. As Exhibit 1 shows, when concentration has been relatively high in the past, it has subsequently tended to decline.

Another way to visualize the movement of concentration over time is to sort our data points into deciles based on Tech’s change in adjusted HHI over the past five years and measure the sector’s average percentage change in adjusted HHI during the subsequent five years. We see a clear negative relationship in Exhibit 2—an indication of mean reversion in action. Currently, Tech’s change in adjusted HHI of 118% over the five-year period ending in June 2023 is unusually high compared to the change of 5% during the prior five-year period ending in June 2018, indicating the rarity of the recent market regime.

The tendency of Tech concentration to reverse has important implications for the performance of equal-weight sector strategies. Exhibit 3 illustrates the relationship between the Tech sector’s adjusted HHI with the relative performance of the S&P 500 Equal Weight Information Technology Index compared with its cap-weighted counterpart. Typically, after peaks in concentration (such as during 1990, 1999 and 2002), equal-weighted Tech has outperformed.

While apprehensions about concentration naturally bring back memories of the 1990s tech bubble alongside potential headwinds for active managers, we should note that today’s Tech sector is very different from that of the 1990s. More importantly, the role of an index is to reflect the market, and history can help us understand the dynamics of the various index weighting options available to track specific market segments.

The author would like to thank Austin Stoll for his contributions.

Surging futures activity on CME Group’s lithium contract allowed for entry into the S&P GSCI Electric Vehicle (EV) Metals Index. This milestone reflects the changing nature of indices to maintain a representative share of the global commodities market. The largest and most recognizable benchmark for commodities, the S&P GSCI, reviews contract eligibility for existing and potentially new contracts. This review allows for the index to add new commodities, like lithium, to commodity giants like wheat, cattle and crude oil. Spoiler alert: lithium has a long way to go in terms of production and trade volumes to qualify for the flagship S&P GSCI. But this raises the question of how indices evolve and what other commodities could enter new and existing indices. In this blog, we attempt to answer that for lithium as well as for the broader commodities market.

The S&P GSCI EV Metals Index seeks to reflect the performance of the tradeable metals used in the production of an electric vehicle. The expertise of S&P Global Commodity Insights is utilized to determine the index constituents and production weights to ensure the index broadly reflects the relative metal usage in a representative EV. To meet liquidity requirements for the financial products that track the index, minimum volume thresholds ensure investability.

Oil futures made their debut on the NY Mercantile Exchange over 40 years ago. A production-weighted index with liquidity filters, the S&P GSCI added light sweet crude oil in 1987, when it took on about one-third of the broad commodities benchmark. With the addition of Brent crude oil to the West Texas Intermediate, the oil component started to dominate the commodities market, peaking at 56% in 2008, which coincided with the fracking boom that transformed the economy and led the U.S. out of the Great Financial Crisis. Energy continues to dominate the global markets and oil remains king. However, peak oil, as measured by the total production and value of commodities traded globally, appears to be waning.

Like early millennials who were born in the 1980s, oil futures are now 40 years old and face a new generation entering adulthood. This new generation of futures contracts are iron ore, cobalt and lithium, which, combined with industrial metals, have come to create a new “sector” of commodities and power the energy transition economy. While these contracts make up the S&P GSCI EV Metals Index, they currently do not qualify for the S&P GSCI. Iron ore is the longest-tenured contract and meets liquidity requirements, but other rules currently prevent it from entering. Exchange location, liquidity and volumes on a particular venue come into play. For example, copper traded on the LME is an S&P GSCI constituent, while copper traded on the COMEX is not.

Quarterly Recap of the Market

Lean hogs and natural gas rebounded in June but remained among the worst-performing commodities in the S&P GSCI YTD. The Dallas Fed Energy Survey showed businesses were no longer expanding for the first time since 2020. On the other side of the pond, Ukraine’s energy minister believes Russia could shut off Russian gas to Europe by the end of 2024, when Ukraine’s supply contract with Gazprom expires. Last year, estimated global nickel mine production increased by about 20%, with the increased production attributed to Indonesia. Forecasts by the International Nickel Study Group maintained that supply growth is forecasted to continue in 2023, though monthly performance appears to have stabilized during June trading. Half-year leaders in commodities were cocoa, sugar and cattle, which have all dealt with weather-related supply shocks: El Niño conditions in West Africa, 2022’s drought conditions leading to supply shortages across sugar-producing regions in Asia and the thinning of North American cattle herds. Cattle futures are currently at an all-time high. Considering downstream impacts, the outlook calls for swapping out beef for pork on your summer barbecues and laying off the venti mocha swirls.