To understand the different types of S&P Dow Jones Indicies it is important to start with the basics of what an index is. An index follows a certain market, sector, asset-class, “concept” or a combination of these to provide a unique, measurable number to investors which helps to trace and summarize its movement for that selected combination.
An index enables tracking of the performance of selected concepts/categories and associated financial products and serves as a benchmark for comparative performance measures of various investments. Indexes can range from being very broad based to extremely specific.
What Are the Indices Offered By S&P Dow Jones Indices (SPDJI)?
Most S&P Dow Jones Indices are equity based and can span across asset classes including commodity, currency, fixed-income, futures, options, private equity and other alternative asset classes. The large volume of Indices available offer solutions for all possible needs from very broad-based indexing to very specific indexing.
Understanding The S&P Dow Jones Indices
What Are the Advantages of Trading Indices?
Index trading offers very high liquidity in commonly traded Indices along with diversification and stock-specific risk mitigation. Investors get to select what they want to trade on, including leverage/margin (trading) with low margin requirements, and small-sized “mini” contracts available at low capital requirements; short selling is also available on index-based products. Lastly, there are low brokerage costs on trading Index-based products such as F&O and ETFs, and there may be a lower tax rate, as well.
Standard Indices Available from S&P Dow Jones:
The majority of S&P Dow Jones Indices are based on common asset classes (equity, fixed income, commodity, currency and real estate).
The plain vanilla Equity based Indices are the biggest lot among S&P Dow Jones Index offerings. Mostly targeted at a particular market, country or region, a further categorization is available by number of stocks included, large-medium-small cap, sector (blue chip, banking, aerospace) or concept (Sharia, Thematic). A large set also includes Environmental, Social and Governance (ESG) category Indices, to track companies demonstrating high engagements of ESG responsibility in selected markets.
S&P Dow Jones Bond Indices offer tracking for municipal bonds, corporate bonds, leveraged loans, money markets, sovereign debt and CDS at global, regional or specific market level.
S&P Dow Jones Currency Indices include standard forex rate Indices against base currencies as well as hedged Indices including ones against base commodities (like oil hedged and gold hedged).
S&P Dow Jones Commodity Indices track commodity futures market prices and associated economic indicators. For example, the world-production weighted S&P GSCI Index tracks price movements and inflation of the global economy. S&P Dow Jones Indices also offer innovative methodologies including strategic futures and risk control Indices to provide exposure to risk levels and controls.
S&P Dow Jones Real Estate Indices track performance of companies directly operating in the real estate domain (building, construction, property development) and REITS. A select variety called S&P/Case-Shiller Home Price Indices track United States real estate residential property prices and are quite popular measures of property prices across the U.S.
Beyond the plain vanilla equity and other asset-based Indices, the real icing on the cake is the exclusive range of indices from S&P Dow Jones which are discussed below.
S&P Dow Jones Specialty Indices
Healthcare Claims Indices track the costs and utilization of healthcare expenses across different genres such as location, healthcare services availed, drug type, etc., these Indices offer vital inputs to insurance companies and health departments for their respective usage.
Consumer Credit Default Indices are based on Experian consumer credit data. These Indices track loan defaults across auto loans, bank cards, first mortgage liens and second mortgage liens.
Other exclusive S&P Dow Jones Indices
S&P Dow Jones Strategy Indices enable investors to gain exposure to specific (or combinations of) factors such as volatility, beta and intrinsic or economic value of stock (Single Factor or Multi Factor variants).
S&P Dow Jones Risk Control Indices offer tracking with an in-built mechanism to indicate a leveraged/de-leveraged status. The Index includes a leverage factor that changes based on realized historical volatility, so that the underlying index remains in control.
S&P Dow Jones Dividend Indices are designed to track the total dividend payments (including dividend alternatives such as preferred stock and MLPs) from the constituents of an underlying index. Periodic resetting to zero on rebalancing dates ensures the correct measure of total dividend paid in the underlying index during the period.
S&P Dow Jones VIX Indices offer benchmarks for implied-volatility expectations and are globally used for trading VIX-based products such as ETFs, futures and options.
With products based on the
S&P Dow JonesCorporate Clusters Indices it's possible to invest in Samsung, Hyundai or Mitsubishi groups of companies
it's possible to invest in Samsung, Hyundai or Mitsubishi groups of companies
. Comprising of listed constituents of a given corporate group, they provide liquid exposure to investments specific to select corporate groups.
Comprising of listed constituents of a given corporate group, they provide liquid exposure to investments specific to select corporate groups.
Examples of few specialty indices include the Dow Jones Luxury Index, which tracks the top 30 listed companies in the luxury goods and services sector, and the Dow Jones Summer/Winter Games Index, which tracks publicly traded companies that are official partners, sponsors and suppliers of the current Olympic Games.
If investors have a very specific investment need on a non-existent customized criteria, the S&P Dow Jones Indices offers the opportunity to get Custom Indices created suiting their needs. Such services are utilized by traders, investors and Fund Managers for Structured Products, OTC Products and other customized financial products. Some organizations also get customized indices for publicity purposes.
The Bottom Line:
S&P Dow Jones Indices offer a lot of variety for trading selected products. The vast number of indices provided allow investors to select the ones matching their criteria. However, investors should note that index products are highly customized offerings and are based on a complex calculation mechanisms. Also note that one can trade on indices through other financial products such as Futures, Options, ETFs, etc., which adds another layer of complexity to trading index products. It is important to understand the underlying computation, identify the dependencies and consider extreme case scenarios before making any choices or investment decisions.
Disclaimer: At the time of writing this article, the author was not holding any positions in any of the S&P Dow Jones Indices.