Market indicators have seen continuous evolution for more than a century of history, but never more than last year.
On July 3, 1884, the world’s first stock index, the Dow Jones Transportation Index, was published by Charles Dow. And since each year, market indicators have evolved and increased in scale and scope to meet the expanding needs of investors. Technology and input value and data have come up with better sourcing markets and more accurate ways of sub-branch reflection. And this has never been true since 2020.
Indicators were first used exclusively to measure the market. More recently, their applications have expanded and they have come to serve as the basis for a wide range of investment products. Innovations continue to drive their expanded use.
Although the indicators include a well-established industry spanning 136 years, the 2020 benchmark survey from the Index Industry Association (IIA) does not fear a structural transformation of a sector. It shows that IIA members reacted quickly, to the contraction and uncertainty that characterized this year’s market and investor preferences.
How did they do it? Creates new types of indicators, especially in the areas of environmental, social, and governance (ESG) and fixed income. Indeed, the survey data shows that index providers are competing and innovating the fastest in these two areas, which offers a new practice for investors that demand it.
So what is the Index Industry Association and what is the purpose of our benchmark survey?
Founded in 2012, IIA represents the global index industry by working with market participants, regulators and other key partners to promote proper practices in the sector while serving investors. Our primary focus is to promote the best practices in the index industry and to inform the public about the value of the market index. Our survey is an annual “report card” for our sector. In this way we measure the total number of indices and identify significant trends in the last year and beyond. Prior to our first survey four years ago, there was no systematic study of the industry to determine how many indicators there are.
Our first survey was eye-opening: it revealed that our members manage about three million indexes. This ubiquity speaks to the usefulness of the index for providing a universe for market measurement, benchmarking, performance attribution, risk analysis, and sometimes investment composition. Many investors only think of investment products based on indicators, when in fact the index has a wide range of opportunities and uses.
Since we started compiling this year’s data, we knew immediately that the results were mandatory. They reflect an industry, investing in research, data and operational capabilities. Due to regulatory and capital changes led by the Great Recession, many research activities previously conducted by The Street are now being conducted by index providers.
ESG net record growth.
The most surprising result of this year’s survey? Unprecedented growth in the ESG index. This would be called a trend. An overview: This is a paradigm shift. The number of indicators measuring ESG criteria has increased by more than 40% in the last year. This represents the largest single-year growth of any single major indicator type in the history of our survey.
While making a significant jump, it probably shouldn’t have come as such a push due to the growing popularity of ESG investments. New regulations, especially in Europe, have increased environmental concerns around the world, and long-term socio-economic and demographic changes have pushed investors toward sustainable strategies.
ESG performance also did not suffer: During the period of epidemic instability compared to last year, ESG has proven its efficiency and excellence in many markets. Research reports on ESG companies have shown that many “wealth lighting” companies have done very well throughout the epidemic.
To be sure, more work is needed to improve ESG data quality. Comparative emissions data, for example, among other inputs, are needed for Apple-to-Apple comparisons. Nevertheless, the data will continue to improve and the indicators will continue to be more precise. And investors should finally come up with common ESG definitions to reflect their social preferences.
Large institutional funds have begun to accept more ESG-friendly orders, which drive the flow of large resources into space. And this growing attention within the institutional segment has spread among retail investors. Index providers have responded to the development of more product and methodological innovations to increase demand for the ESG index. The old days of managing ESG by simple exclusion screens are over. There are now more sophisticated ESG factor-based indicator screening and weighing processes.
Fixed income became dynamic.
Fixed income spaces have similarly expanded exponentially. Our survey found that the number of indices covering fixed income markets increased by 7.1% last year and about 15% in the last two.
Due to the complex and opaque nature of the bond market, fixed income is often considered “more difficult to measure”. But index providers have invented and developed new indices that give investors access to areas that were previously unavailable to a specific income sector.
Our survey found that the highest percentage of fixed income indicators is in the United States. This is not the case with equity. What explains the inconsistency? Diversification of fixed income markets in America. For example, the United States has many more types of municipal bonds and a much wider securitization market than other countries.
Trends in equities
According to our survey, industry and sector indicators account for about half of the equity index and have dynamics towards more global indicators. In 2020, the cap-weighted index declined compared to new sectors such as the ESG and thematic indices. The fact that America has such a low percentage of equity indices may come as a surprise to some, but many countries in Europe, the Middle East and Asia are running out of their own stock market results. Our survey shows a growing percentage of emerging and border equity market indicators.
A year of publication
Although the ESG and Fixed Income Index have experienced the most growth and investment in the industry in 2020, they reflect broader changes. The index industry has seen more innovation in the last decade than the previous 13. As investor demand has increased and evolved, the index has adapted to keep the industry dynamic.
New participants tend to enter a competitive space. ETFGI, an ETF industry consulting and research firm, follows 255 index providers, while Morningstar has 199 index providers in its database. There is no shortage of companies trying to come up with new and “better” ideas. ETFGI recently reported that global assets invested in index-based ETFs and ETPs have surpassed US 7 7 trillion at the end of August, after accelerating growth in recent years.
So what fuels this growth? The main culprits and investors have benefited greatly from cost reduction. The Committee for Economic Development (CED) estimated in a 2019 study that the cost to investors could range from $ 12 billion to 15 15 billion per year. Add to this the reduction in fees on all kinds of funds and transaction costs, and the center estimates that cost savings will be between বিল 40 billion and 50 50 billion annually.
The year 2020 has created a tremendous challenge for the global financial markets, for the index industry and for the world. The indicators were battle-tested in real time and the index providers showed their consistency and readiness.
The results of our survey put the future of the industry and the market at ease: this future will meet the needs of investors across new investment standards, broader informational needs and products that more directly – and cheaply – across a wide set of asset classes.
This is the third installment in a series from the Index Industry Association (IIA).
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.
Photo Credit: © Getty Images / Paolo Carnassel