SRP Index Report 2023 - Market Cap/Industry Sectors

INDEX REPORT 2023

Market cap / Industry sectors

Undisputed Dominance

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The structured products market remains a focus for innovation as product providers and investors move towards customised underlyings.

Despite the increased demand for new thematic and sophisticated underlyings, traditional market cap and industry sector indices continue to be at the centre of the market in terms of issuance and sales.

The SRP Market cap/Industry sector Index Report is the second of four chapters that will be released throughout the year and will comprise the SRP Index Report 2023.

The SRP Market cap/Industry sector Index Report aims to show the landscape and evolution of this part of the market and provide insight on issuance and sales activity around these index categories in the structured products market.

The report also seeks includes input and thought leadership with a global overview of market activities and highlights from the main suppliers of Market cap/Industry sector to the structured products market.

Market cap indices Undisputed dominance

Despite a shift towards custom and bespoke strategies in the structured products market, traditional market capitalisation indices continue to dominate issuance and sales by far.

Market cap indices under SRP’s classification follow market standards and include indices that provide exposure to the

equity markets of a specific country or region and comprise securities fulfilling pre-defined market capitalisation requirements. The market cap sector comprises 121 indices featured in the structured products market over the last two years – since H2 2021 - in “not-flow” single underlying products.

Sales for structured products linked to a single market cap index spiked in 2022. Having been around the US$75 billion mark during 2019 – 2021, volumes reached US$91.7 billion in 2022 – an increase of 21% year-on-year (YoY).

Market cap-linked issuance in 2022, at around 19,400 products, was up 53% from the low of 2021 when 12,700 products were tied to a single market cap index. Issuance in

2019 and 2020 stood at 20,400 and 14,725, respectively. Boosted by an increased demand for structures on the S&P 500 in the US market, volumes for products linked to a single market cap index in the Americas reached US$41.7 billion in 2022 – up 68% YoY.

In the US market alone, some US$32.3 billion was gathered from 6,400 products linked to the S&P 500, well ahead of the

Market cap (single index): sales & issuance (US$m)

Market cap (single index): annual sales evolution (US$m) by region

Market cap (single index): Apac - market exposure

Market cap (single index): Emea - market exposure

volumes invested in other market cap indices such as the Russell 2000 (US$2.3 billion from 542 products), Nasdaq-100 (US$1.6 billion from 377 products) and DJ Industrial Average Index (US$955m from 210 products).

Investors in the Asia Pacific (Apac) region also have a healthy appetite for products linked to market cap indices, although sales for 2022, at an estimated US$30.2 billion, were down 18% YoY.

The largest chunk of volumes came from the South Korean market where US$17.2 billion was invested in products linked to the local Kospi 200 while the CSI 300 Index (US$4.4 billion) and Hang Seng Index (US$3.9 billion) were the preferred market cap indices for investors in China and Hong Kong SAR, respectively. The South Korean market however has a preference for baskets of indices linked to market cap indices which are accounted for in the market cap multi-index category.

Sales in Europe, Middle East and Africa (Emea) were up 40% YoY: from an estimated US$14.2 billion in 2021 to US$19.8 billion in 2022. Here the Eurostoxx 50, with sales of US$12 billion for the year, was head and shoulders above the

Market cap (single index): index providers market share (US$m)

competition, which included the FTSE MIB Index (US$2 billion) and FTSE 100 (US$1.8 billion).

Market exposure within market cap indices is mostly focused on the three main regions, Americas, Apac and Emea –accounting for a combined 98.2% in 2022 – with a much smaller percentage linked to multiregional indices (World).

Between 2019-2021, Apac was the dominant region, reaching a high of 42.1% in 2021. However, since then Apac exposure has dropped by more than 10%, with the USA the main beneficent, capturing 45.2% in 2022.

Of the three main regions, the Americas is the most diverse, with exposure to seven different regions between 2019-2022.

Exposure to USA indices has always been the highest in the region, but it took until 2022, when it reached 91% (+13% YoY), for USA to really show its dominance. This came at the expense of Emea, which saw its exposure fall by eight percentage points, while USA/Canada, and World (ex-USA) each saw their exposure halved compared to 2021. A smattering of products was linked to indices with exposure to Apac, Latin America and World.

Market cap (single index): Americas - market share index provider

structuredretailproducts.com

Market cap (single index): Apac - market share index provider

Market cap (single index): Emea - market share index provider

Like the Americas, Apac has always been dominated by indices tracking local companies. This was never more evident than in 2022, when they claimed 94.1% of the market, up 7.5 percentage points YoY. The other regions the market had exposure to in 2022 where USA (5.4%, down from 10.9% in 2021) and Emea (0.5%, down from 2.4%).

Whereas in the Americas and Apac, there was a shift towards indices with local exposure in 2022, the opposite happened in Emea where exposure to indices linked to the Emea market, which had been as high as 96% in 2019, fell to 88% in 2022, with USA (9.8%), Apac (1.1%) and World (0.6%) all increasing their market share.

Driven by the increased demand for structured products linked to the S&P 500 on its own in the US market, S&P Dow Jones became the biggest provider for market cap indices used as a single index to underly structured products in 2022.

Market cap (single index): historical market share top 10 in 2022

The US index provider held a 41% share of the global marketcap market with its indices, ahead of CSI (25%), which had been the main provider in 2021, courtesy of the performance of its CSI 300 and CSI Smallcap 500 indices in the Chinese market.

Qontigo, in third position with a 16% market share, FTSE Russell (6.8%) and Korea Exchange (four percent) completed the top five ranking.

In the Americas, products linked to S&P Dow Jones indices captured 83% of the market for single market cap indices in 2022, up from 65.7% the previous year. They collected a combined US$34.8billion (2021: US$16.3 billion) of which almost 93% came from products on the S&P 500 that were sold in the US market. In Canada, US$1.5 billion was gathered from 636 products while the index provider also had a presence in Brazil, albeit at a much smaller scale (US$1.4m from 85 products).

Market cap (single index): top 10 by market share 2019-2022

Qontigo’s market share – almost exclusively generated from products linked to the Eurostoxx 50 – decreased from 12.7% in 2021 to 5.1% in 2022. Products linked to its European benchmark index sold more than US$2 billion in the US (from 523 products) with a further US$77m collected in Canada (from 39 products) and US$2.5m in Brazil (from 153 products).

FTSE Russell’s share dropped even more than Qontigo’s: from 14.2% in 2021 to 5.6% in 2022. It accumulated sales of US$2.3 billion from products linked to either the Russell 2000 (544), FTSE 100 (five) and Russell 1000 (four). All but two of the products were targeted at the US market.

Nasdaq held 3.8% market share while MSCI (1.5%) and Solactive (0.4%) were also active suppliers of market cap indices.

China’s China Securities Index (CSI) and the Korea Exchange (KRX) dominated the supply of market cap indices to the Apac market. The former collected an estimated US$22.8 billion in China – the equivalent of a 75.4% market share. Some US$18.4 billion came from 832 products linked to the CSI 500 and a further US$4.4 billion from 139 products tied to the CSI 300 Index.

KRX’s Kospi 200 benchmark has seen a significant drop in volumes since 2019 when it held more than 25% of the Apac market. In 2022, its market share of just over 12% was achieved from 1,058 products sold in South Korea. Of these, more than 75% offered a capital protection of at least 100%.

In Emea, Qontigo was by far the biggest provider capturing at least 75% of the market during 2019-2022. However, in 2022, when US$12 billion was invested in products linked to its indices, the company saw its market share fall to 61% (down 16 percentage points YoY) with FTSE Russel making inroads. The latter claimed almost 20% of the market in 2022, up from 9.1% the previous year.

Another provider that upped the ante in 2022, albeit on a smaller scale, was Nasdaq with a 2.4% share of the market (2021: 0.2%). The company’s flagship Nasdaq 100 index was seen in 12 different jurisdictions, of which Switzerland, France and Italy were the most active.

During 2019-2022, the S&P 500 accumulated sales of US$101 billion when used as a single index. Its market share for that period was 32%, well ahead of Eurostoxx 50 and CSI Smallcap 500, which held 19% and 14% respectively.

Both the S&P 500 and Eurostoxx 50 have a global presence, but the CSI Smallcap 500 and its sister index the CSI 300 Index, are rarely seen outside China, having much more of a local focus.

The same applies to the Kospi 200, which is mainly seen in South Korea, the Nikkei 225 (Japan) and FTSE 100 (UK), while Russell 2000 and DJ Industrial Average are very much used as the underlying for structured products targetted at investors in the US.

Market Cap: Multi Index

Sales for structured products linked to a basket of market cap indices have been topsy turvy in recent years, whereas issuance has remained relatively stable. In 2019, they reached a high of US$87 billion (from 23,200 products) before dropping 32% to US$59 billion (21,050 products) the following year.

By 2021, sales, at US$75 billion (23,300 products), had picked up again only to fall 28% in 2022, despite a peak in issuance (US$54 billion from 24,900).

Structured products linked to a basket of market cap indices have always been the most popular in Apac, with the exception of 2022, when sales were higher in Americas. In 2019, US$67 billion was invested in index baskets in the Apac region, with the Korean market responsible for US$64 billion alone and a further US$3 billion in Japan.

By 2022, Apac volumes had dropped to US$21 billion, but South Korea and Japan remained the dominant markets

with baskets comprising Eurostoxx 50, Kospi 200 and S&P (US$9 billion from 3,900 products) the preferred option for the Korean investor while the combination of Nikkei 225 and S&P 500 was the number one choice of their Japanese equivalents (US$2 billion from 180 products).

In the Americas, baskets composed of Nasdaq 100, Russell 2000, and S&P 500 were the most popular in 2022 (US$8 billion from 2,850 products) followed by Russell 2000 and S&P 500 (US$4.2 billion from 1,855 products).

There has always been less interest in index baskets in Emea, were volumes have been considerably lower than in the other regions (2022: US$5.4 billion).

Here, the most successful basket comprised Eurostoxx 50, S&P 500 and Swiss Market Index (SMI), which was predominately the domain of investors in Switzerland (US$1.8 billion from 2,775 products).

Market cap (multi index): Americas - market exposure

Market cap (multi index): Emea - market exposure

Across the three regions, exposure was mostly diversified although interest in Americas increased steadily over the years. In Apac, exposure was 100% diversified in 2022, and almost as high for 2019-2021, with less than one percent Apac/Emea exposure during this period.

In the Americas, local exposure increased from 55% in 2019 to 81% in 2022. The only other significant exposure was diversified, which saw its market share go in the opposite direction: from 45% in 2019 to 19% in 2022%

Over the years, the Emea region also tilted more and more towards diversified exposure (74% in 2022). Exposure to Emea, and Europe especially, which in 2019 was still relatively

high at 40%, had fallen to 22% by 2022, a year which also saw limited exposure to Americas (five percent). During 2019-2022, structured products linked to a basket comprising Eurostoxx 50, Hang Seng China Enterprises Index, and S&P 500, collected combined sales of US$44.8 billion.

They were mainly sold in South Korea, as were structures linked to the Eurostoxx 50, Kospi 200 and S&P 500 (US$36.5 billion).

Products on the third most popular basket, which included the Nasdaq 100, Russell 2000 and S&P 500 were predominately sold in the US market (US$23 billion) while the Nikkei 225/S&P 500 combination was the preferred option for investors in Japan (US$14.4 billion).

Industry Sector Single Index

Industry sector indices remain a popular choice in the structured products market and have become drivers of new sectorial investment trends however these indices have fallen in the pecking order at the expense of ESG/decrement and strategy (factor) indices.

Issuance and sales of structured products linked to industry

sector indices almost doubled in 2021 compared to 2020, with a slight decrease in sales and flat issuance in 2022.

SRP’s industry sector group covers strategies that provide exposure to an equity sector defined by economic activity, from agriculture to industrial, healthcare and financial services, and covers companies that operate in a similar business

sphere such as retail financial services, consumer goods & services, utilities, communication, industrials & related services, information technology & services, healthcare, commercial services, and commodities. The industry sector index group comprises 60 indices developed by index providers and investment banks featured during the last two years in the public structured products market.

An estimated US$8.5 billion was collected from 3,110 structured products linked to a single industry sector index in 2022, down 20% by sales volume YoY, but an increase of 70% and 123%, respectively, compared to 2020 and 2019.

In 2022, 54 different industry sector indices were utilized. Of these, the Solactive Canada Bank 40 AR Index, seen in 1,162

Industry sector (single index): market share index providers (US$m)

Industry sector (single index): market share by sector (US$m)

products, was the most frequently used while its sister index, the Solactive Canada Bank 30 AR, was the most popular in 2021 (739 products).

In 2022, more than 50% of sales volumes came from products linked to indices with a decrement element, a figure which was even higher the previous year (2021: 60%). However, in 2020, only 18% of sales was invested in products linked to decrement indices, while in 2019 they were non-existent.

Over the years, the bulk of sales has always been linked to products sold in Emea, and especially the Americas. The latter region has seen volumes spike in 2021 and 2022, with sales of US$7.2 billion and US$5.2 billion, respectively, compared to US$3.3 billion and US$3.2 billion for Emea during the same period.

Investors in Apac have always had limited access to industry sector indices, with only US$60m invested in 2022.

In 2022, US$3.4 billion was invested in indices with exposure to Canada, with a further US$3.3m linked to indices with exposure to Emea. The former was driven by several Solactive industry sector indices that were specifically targeted at the

Industry sector (single index): Americas - market share index provider

Canadian market, including the aforementioned Solactive Canada Bank 40 AR Index.

Emea was represented mostly via Qontigo’s Eurostoxx Banks Index as well as its decrement version the Euro iStoxx Banks GR Decrement 50 Series 2 Index and the Stoxx Europe 600 Oil & Gas Index.

Some €750m was linked to indices with exposure to the US market, of which the Solactive United States Big Banks AR Index gathered the biggest volumes while the S&P/TSX Composite Index Banks, S&P/TSX Capped Utilities Index, and S&P/TSX Composite Index Life & Health Insurance, which accumulated a combined US$500m in 2022, offered access to both US and Canada.

Hang Seng Tech Index was the only index with exposure to Apac in 2022 (US$52m).

Solactive claimed 47% of the market for industry sector indices in 2022 – down from 56% the previous year. The German index provider first started to make noticeable inroads in 2020, when several Canadian providers including Canadian Imperial Bank of Commerce (CIBC) and Scotiabank, started

Industry sector (single index): Emea - market share index provider

structuredretailproducts.com

Industry sector (single index): Apac - market share index provider Industry sector (single index): Americas market exposure*

using its indices in their local market, and since then it has gone from strength to strength with close to US$4 billion invested in products linked to its indices in 2022.

The other dominant provider in this category is Qontigo, which saw US$3.1 billion – the equivalent of a 37% market share –attached to its industry sector indices during 2022, steady compared to the previous year (2021: 36%) but significantly down from 2020 (58%) and 2019 (71%). In 2022, its industry sector flagship Eurostoxx Banks index collected US$2.1 billion from 750 products that were sold across 18 different markets.

S&P Dow Jones captured eight percent market share in 2022, followed by Bloomberg (2.1%) and HKEX (0.6%).

Financial services, i.e. banks, were by far the biggest sector. In 2022, they represented 81% of all sales volumes invested in products linked to industry sector indices, while in 2021 this figure, at 85%, was even higher.

Other sectors that stood out, albeit at a much smaller scale, were energy and utilities, with a market share of 7.6% and 3.3%, respectively. Products linked to healthcare indices, which held 10% market share in 2020, saw their volumes drop to US$80m in 2022 (0.9% market share).

Solactive was the number one provider in the Americas, claiming 75% of the market in 2022, with almost all the US$3.8 billion it collected tied into products sold on the Canadian market. At US$2.2 billion, the bulk of its volumes for the year came from 1,162 products linked to the Solactive Canada Bank 40 AR Index, which was seen for the first time on the SRP database in 2022. Other popular indices from the German company were Solactive Equal Weight Canada Banks 5% AR Index (US$475m/220 products), and Solactive United States Big Banks AR Index (US$350m/166 products).

Solactive’s rise came at the expense of S&P Dow Jones, which up until 2019, when it captured 55% of the market, had been the main provider in the region. By 2022, its market share had dropped to 11%, however, volumes for its two main indices – S&P/TSX Composite Index Banks and S&P/TSX Capped Utilities Index – remained stable during 2019-2022, while sales for products its S&P/TSX Composite Index Life & Health Insurance reached US$90m in 2022 – a 10-fold increase YoY.

Qontigo always has been less active in the region. It held a 5.5% market share in 2022, down 2.2 percentage points YoY.

Emea paints a different picture. Here, Qontigo had very little competition, especially during 2019-2021, when it had almost

Industry sector (single index): Americas sector exposure Industry sector (single index): Apac sector exposure

full control of the market, thanks to the performance of the Eurostoxx Banks, and, to a lesser extent, indices like the Stoxx Europe 600 Oil & Gas Index, Eurostoxx Utilities, and Eurostoxx Oil & Gas.

In 2022, Qontigo still held 88% of the Emea market, but competition, which came in the shape of Bloomberg, S&P Dow Jones, Solactive and Morningstar, had somewhat increased. Total volumes for the year were US$3.2 billion, down from US$3.3 billion in 2021.

In Apac, initially Qontigo was the dominant provider, claiming most of the market in 2019-2020, but since 2021 Hang Seng has taken pole position. Compared to Americas and Emea, volumes invested in products linked to industry sector indices are very low in Apac. In 2022 they stood at US$60m, down from US$135m the previous year.

It came as no surprise that in each of the three regions, indices with local exposure were most in demand.

In the Americas, until 2019, indices with exposure to both the USA and Canada, claimed 60% market share, courtesy of the S&P/TSX Capped Utilities Index, S&P/TSX Composite Index Banks, and S&P/TSX Composite Index Life & Health Insurance. By 2022, their share had dropped to 11%, even though their actual sales volumes remained relatively stable compared to 2019-2021. The decrease in market share was mainly driven by the big rise in Solactive indices offering exposure to Canada, which increased their market share from 20% in 2019 to 68% in 2022.

Volumes for products linked to industry sector indices in the Americas in 2022, at US$4.8 billion, remained the highest of the three regions, despite falling 33% YoY.

Industry sector (single index): top 10 by market share 2019-2022

In Emea, exposure to Europe was close to 100% between 2019-2021. In 2022, when volumes reached US$3.2 billion (-1.50 YoY), exposure decreased to 93%, with just under seven percent invested in indices linked to the USA and 0.2% linked to Apac.

In Apac, where volumes always have been significantly lower (2022: US$60m), the demand has shifted from Emea exposure in 2019-2020 (Stoxx Europe 600 Oil & Gas) to Apac exposure in 2021-2022 (Hang Seng Tech Index).

In the Americas (and Emea as well for that matter), the biggest chunk of volumes has always been invested in products offering exposure to financial services. In 2022, their market share was 85%, while in 2021 it was even higher at 92%.

The energy sector increased its market share to 9.2% in 2022 (from 1.4% in 2021) mainly driven by the Energy Select Sector Index, which was linked to US$450m in sales volumes during the year.

Products linked to the utilities sector sold US$230m (4.4% market share) while the only other sector seen in the Americas in 2022 was telecommunication services (1.6% market share).

Like the Americas, financial services were also the main sector in Emea, with a 75% market share from US$2.4 billion sold in 2022. However, the number of sectors structured products provided exposure to in Emea was much higher during the year: 10 vs four in Americas.

Materials grabbed 10% of the market, while energy (4.6%), information technology (3.5%), health care (2.5%), and utilities (1.5%) all played their part in 2022.

Investors in Apac had only access to two sectors in 2022: information technology and energy. Of these, products linked to the former achieved sales of around US$60m, which is equal to 80% of the market.

Products providing exposure to financial services and health care were last seen in 2019 and 2021, respectively.

Structures tied to the Eurostoxx Banks collected US$6.9 billion (from 1,471 products), making it the best-selling industry sector index for the period 2019-2022. In 2022 alone it sold US$2.1 billion, a figure that was only bettered by the Solactive Canada Bank 40 AR Index, which debuted that year, with sales of US$2.2 billion (from 1,162 products).

Industry Sector Multi Index

Although industry sector indices were mainly used as a single index, in some markets they were also seen as part of a basket. Sales and issuance figures for these multi-index-linked products were much lower though than for their single index counterparts.

In 2022, they collected an estimated US$875m from 325 products, compared to US$8.5 billion that was gathered from 3,110 structured products linked to a single industry sector.

Combined, single and multi-industry sector indices sold US$9.3 billion in 2022, down 21% YoY (2021: US$11.8 billion).

Sales of products linked to multi-industry sector indices came

mainly from the Americas, where they collected approximately US$700m in 2022, compared to US$175m in Emea. In Apac, no such products were sold.

Canada was by far the biggest market for multi-index products, followed by Italy and the USA.

In 2022, Canadian clients invested approximately US$680m in products linked to baskets of two or more industry sector indices, compared to US$1 billion the previous year.

In Italy, sales increased from around US$25m in 2021 to US$125m in 2022 while in the USA they went down from US$90m to US$15m in the same period.

FTSE Russell

FTSE Russell is the provider of some of the most popular market cap indices used in three key retail structured products markets - the UK ( FTSE 100), Italy (FTSE MIB) and the US (Russell 2000).

The footprint of the trio however goes beyond their domestic market - The FTSE 100 features in more than 33,000 live products across markets including over 21,000 tranche based products and over 12,000 flow and leverage products with combined assets worth an estimated US$100 billion.

The FTSE MIB appears in the underlying of over 11,000 live products worth an estimated US$5 billion; and the Russell 2000 is part of the underlying on 25,000 live products worth an estimated US$85 billion, which shows its appeal for investors seeking access to one of the most comprehensive representations of the investable US market and its segments.

According to the index provider, the Russell US equity indices have over US$12 trillion in AUM.

“These indices very much remain a core part of our offering, but we have the capability to develop investment overlays on some of the world’s highest quality indices and we can deliver them fast,” said Maxime Adam, head of sell-side Emea, index investments group at FTSE Russell, adding that notional for these indices has grown over the last three years and even more so last year with numbers for Q1 significantly up, especially on the Russell 2000.

“Quite a few banks are providing strategies on the Russell 2000 - some are going long on the index and others are shorting the index or shorting part of Russell because of what has recently happened with some small banks in the US and pitching that to their clients as strategies,” Adam said.

Demand for FTSE Russell’s flagship market cap indices in the UK and Italy over the last two years has remained “very strong” and was boosted by “very high demand for overlay strategies”, mainly on the FTSE 100.

“Decrement and target volatility indices are growing very fast. Decrement has grown 300% in the last three years on the FTSE 100; target volatility strategies are also getting some traction,” said Adam.

FTSE Russell is working with several partners that are doing single stock decrement indices since Q2 21 which had some success in various parts of Europe.

“We mainly see demand for indices on French stocks, Swiss stocks and also on financial and energy stocks on the back of market trends such as higher interest/inflation, and the energy crisis,” said Adam.

FTSE Russell market cap indices - sales and issuance 2021-2022

Russell decrement indices - sales and issuance

When it comes to industry sector exposure demand remains stable “but it seems to be mostly banks and energy stocks that trade”.

“We’ve had conversations about healthcare, metal and mining and we are also talking about more niche sectors like agriculture, or forestry, but in terms of numbers and volume it is very much banks and energy that people ask for,” said Adam.

“It’s good to have a good story. However, the demand is more for benchmarks rather than complex indices. People tend to go for safe options during market downturns.”

According to Adam, the rising interest rates environment has not had an impact on the demand for decrement indices while risk control has gained renewed momentum.

“We still see demand for decrement [and] target volatility is something we are seeing now too,” he said.

“We have live indices on the FTSE 100 and Russell 2000 with target volatility. There will be products on those indices very soon. Markets continuously change, higher interest rates, inflation, energy crisis etc and drive the demand we’re seeing from our clients.”

Megatrends is still something that is very high up in conversations, but thematics are becoming increasingly important, including themes like climate change, cloud computing, AI, machine learning, and healthcare.

“[We] see demand here and there for digital or even AI, but the bulk of the volume is more in variations of sector or benchmark indices rather than megatrends,” said Adam. “Growth will come from flexibility, hight quality and quick delivery of exposure to new trends in both underlying indices and overlays.”

FTSE Russell is close to launch the new FTSE 100 Risk Adjusted ESG, which will be its flagship UK ESG index and is also working on bringing the Transition Pathway Initiative (TPI) dataset to Continental Europe following its success in the UK.

The index provider is also seeking to build out on the success of the Russell indices and expand its offering with thematics, and ESG but also overlays and real time.

“Russell is interesting - it is a very strong brand in the US,” said Maxime. “We see big numbers for the Russell 2000 and it’s our index with the largest notional.

“In Europe, historically, there was probably a bit less demand than in the US but talking to clients, it seems that there is more appetite and demand for it. We are building out on the success on the Russell indices to expand our offering.”

Last year FTSE Russell launched the Russell 2000 ESG “which is something that could work and resonate well with investors in Europe”.

“We are also looking at sector and thematic indices on the Russell indices,” said Adam

Qontigo – market cap remains core while sectors drive new themes

Qontigo is a well-established provider of market cap and industry sector indices to the structured products market. The company’s flagship index, the Eurostoxx 50 index, is one of the most widely used underlying assets in the structured products market globally and has appeared consistently in the global top three underlying ranking over the last two years.

In the market cap category, the top three best-selling Qontigo indices in the structured products market include the Eurostoxx 50, DAX, and Stoxx Europe 600.

The Eurostoxx 50 index appears in the underlying of more than one million products worth an estimated US$1.2 trillion across markets. Qontigo saw more than 42,000 products linked to 155 of its indices worth an estimated US120 billion across markets over the last two years.

Traditional market cap indices dominate by far in terms of number of listed products but there has been a shift towards custom strategies in certain segments of the structured products market in Europe, according to Armelle Loeb, Qontigo, head of index sales Emea and member of the STOXX management board.

“These are segments with a smaller number of listed products but much larger volumes,” she said.

The mass-listed market which is characterised by its large number of off-the-shelf listed products is a driver of activity around market cap indices, but it is difficult to measure in terms of volumes, as many listed products do not even trade.

“If we look at the number of products in the listed market,

Qontigo industry sector indices - sales and issuance 2021-2022

traditional market cap benchmarks still dominate the stats, because of the sheer volume of listed products, but in terms of aggregated notional it is a smaller market,” said Loeb.

At present, added Loeb, the index provider has not noticed a shift in the use of underlyings in that market and issuers continue to use the Eurostoxx 50, DAX or STOXX Europe 600 Sector indices.

“However, we see more variety in the use of underlyings within the other two segments of the European structured products market – the non-mass-listed retail segment and the institutional segment,” she said.

The non-mass-listed retail market is characterised by a lower number of products with a subscription period, often longer investment terms and much larger notionals. These are products often using indices designed specifically for these products.

“These indices can still be market cap-weighted, but most of the time include some sort of ESG screens, region, sector or thematic tilt and are optimised to offer more cost-efficient optionality and better potential upside to the end investor either via price overlays such as decrement, or defensive features such as risk control,” said Loeb.

Qontigo market cap indices - sales and issuance 2021-2022

In the institutional side of the market, products are not always listed, and they are large products in terms on notional usually based on custom or derived indices, according to Loeb.

Sector indices

In the industry sector category, Qontigo is also a leading supplier of underlyings for structured products. SRP data shows that the Eurostoxx Banks was the best-selling industry sector index between 2021 and 2022, followed by the Stoxx Europe 600 Oil & Gas Index, Eurostoxx Utilities, Eurostoxx Oil & Gas and Eurostoxx Insurance.

Other industry sector indices recorded in the structured products market over the last two years include the Eurostoxx Automobiles & Parts, Eurostoxx Construction & Materials, and Stoxx Europe 600 Insurance, among others - there were 31 Qontigo sector indices across more than 2,300 products worth an estimated US$13 billion.

According to Loeb, sector indices also remain an important part of the index provider’s offering and they still drive significant activity and volumes.

“Sector indices have always played a specific role for investors seeking targeted and more tactical exposures as the different sectors can offer value at different times,” she said.

“Among the traditional 11 industries, apart from the usual rotations generated by geopolitical or economic events, we do not notice any new trend.”

Loeb notes that traditional sectors are easier to define when building an index, but when it comes to new businesses not yet generating revenues it requires new data sets, such as patterns and the use of artificial intelligence.

“As an index provider, we are working with our clients to identify new interesting themes, on-board relevant data providers and define robust index methodologies,” she said. It’s not always easy for instance how to define a valuable brand or companies whose activities do not have a negative impact on the oceans.

“Some of these themes will remain as such but some might become the sectors of tomorrow,”

The index provider is also a leading supplier of market cap and sector indices optimised to be used in structured products under the iSTOXX brand which was launched in response to client demand.

“We have more than 25 variations within our industry sector family with different levels of decrement including banks, chemicals, consumer products, industrial goods, automobile, health care, oil & gas or telecommunications,” said Loeb.

We have more than 25 variations within our industry sector family

Armelle Loeb, Qontigo

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CSI – market value, liquidity take CSI 500 to the top

China Securities Index (CSI) is the provider of the CSI 300 index and the CSI Smallcap 500, two of the most popular underlyings in the Chinese market.

SRP data shows that the CSI 300 index has been featured as a single index across 470 products worth US$12.3 billion between 2021 and 2022. The CSI 300 is also included as the underlying in 567 live products worth an estimated US$2.2 billion.

The CSI Smallcap 500 featured in more than 1,800 products with combined sales of US$32.9 billion during the reporting period. Of these, 711 (US$11.3 billion) are live products (as of 15 May 2023).

In October 2014 the Chinese index provider introduced the CSI 1000 Index, which is comprised of 1,000 small and liquid stocks of all A-shares, excluding the CSI 800 constituents. Of the 63 products launched linked to the CSI 1000 index worth an estimated US$ 988 million 59 are live products (US$926m).

Equity index investment is at a stage of rapid development in China driven by broad-based indices, according to Jin Di, executive director, sales & marketing at China Securities Index.

“As the market value and liquidity of the CSI 500 constituent stocks continue to rise, investors have greater need to hedge the medium and small market cap constituent stocks,” he told SRP.

“The CSI 500 option provides various hedging methods in view of the backwardation of the CSI 500 index futures.”

The CSI 1000 has gained noticeable traction as a result of the listings of its futures and options in July 2022. China Merchants Bank issued 63 structured deposits tracking the index with a tenor from one to three years during April and May, SRP data shows.

CSI market cap indices - sales and issuance 2021-2022

In addition to the CSI 1000 options and futures, the CSI 500 ETF options and SSE 50 options, which also went live in 2022, have “received wide attention” from the market, according to Jin.

The launches have helped form “a relatively complete risk management system” across large, medium and small-cap Chinese stocks.

Beyond broad-based indices, SRP data shows that CSI has several industry sector and custom indices focused on equity used in structured products including the CSI Banks Index, CSI Photovoltaic Industry Index, CSI National Defence Industry Index, CSI Hong Kong 1.3 Index and CSI CITIC Multi-asset Trend Index.

In the past year, we’ve launched a series of customized indices, which are mainly in equity indices but also include two multi-asset indices – the CSI Haitong ESG Equity and Bond Coordinated Index and CSI Haitong Multi-Asset Dynamic Allocation Index,’ said Jin.

To improve the customisation efficiency, CSI is setting up a client service platform and an index R&D platform.

“Nowadays, the indexes customised by institutional investors primarily focus on specific investment scopes and sectors, such as regional indexes where the constituent stocks are listed in a certain region,” said Jin.

According to Jin, there has been a growth in the thematic index space, particularly in technological innovation, ESG and central government-owned enterprises since 2022. The demand is driven by national initiatives including the carbon neutral strategy, the establishment of a valuation system with Chinese characteristics and a registration-based IPO system.

“Short-term fixed income indices recently have become more popular among investors with low to medium risk appetite, featuring interbank negotiable certificates of deposit indices and commercial paper indices,” he added.

What requests are you getting from derivatives desks in China year-to-date?

The CSI 1000 index futures, CSI 500 ETF options, SSE 50 index options, and CSI 1000 index options, which went live in 2022, have received wide attention from the market. In Q1 23, the respective number of contracts traded on the CSI 1000 index futures, CSI 1000 index options, China Southern CSI 500 ETF options and Harvest CSI 500 ETF options reached 3.0 million, 3.3 million, 2.0 million, 30.8 million and 6.3 million.

As the government aims to develop a multi-layer capital market in China, investors’ demand for derivatives linked to medium-tosmall market cap stocks and sectors is expected to keep rising. In addition to equity-linked derivatives, investment demand for fixed income-linked derivatives has also increased. On 21 April, the 30-year central government bond (CGB) futures went listed on the China Financial Futures Exchange, acting as an effective tool for ultra-long-term interest rate risk management.

What new indices are gaining traction in China?

Since 2019, the Chinese derivatives market has been developing steadily with wider variety of products being introduced. New derivatives tied to the SSE 50 Index, CSI 500 Index, CSI 1000 Index and ChiNext Index or their ETFs went live in 2022.

We trust that the introduction of index derivatives can help improve the multi-layer capital market and promote its sustainable development. Therefore, it’s critical for index derivatives to optimize the efficiency of resource allocation and market price discovery as well as to enhance the market liquidity and act as effective risk management tools. At present, customized indices are still in the nascent stage of development and have insignificant presence in the derivatives space. Their AuM and trading volume are much smaller than that of broad-based indices. However, we’re very hopeful about the growth.

Index customisation is an important service for CSI. We’ve been working to optimise the processes involving the receipt of clients’ request and the assessment of their demands and index development as well as release. We’re also in the process of setting up a client service platform and an index R&D platform to improve the customisation efficiency. Nowadays, the indexes customised by institutional investors primarily focus on specific investment scopes and sectors, such as regional indexes where the constituent stocks are listed in a certain region. The indices may also be designed

to reflect the individualised strategies by deploying the multifactor stock selection method as specified by the investors. Besides, some indices feature unique methods, such as the selection of stock constituents, weighting or calculation.

How does the demand for CSI indices differ onshore vs. offshore in the derivatives market?

In the OTC market, the demand from onshore investors is more diversified in terms of asset class – from stock indices, bond indices to multi-asset indices. Meanwhile, the demand from offshore investors is concentrated in the CSI 300, CSI 500 and CSI 1000. There’re more structured products tracking CSI indices traded onshore than offshore. So far, we have not observed any obvious change in the demand for the CSI indices in the onshore derivatives market, but we’ve noticed that more clients started to pay attention to the CSI 1000 Index.

Why has the CSI 500 such a dominant position as underlier in the Chinese derivatives market?

As the market value and liquidity of the CSI 500 constituent stocks continue to rise, investors have greater need to hedge the medium and small market cap constituent stocks. Additionally, hedging is in great demand for institutional investors amid higher market volatility for a few reasons.

First, CSI 300 options hardly allow investors to properly hedge the risks from the CSI 500 because the differences between large-cap and small- to- medium-cap constituent stocks lead to low correlation of the two index futures. Second, the CSI 500 option provides various hedging methods in view of the backwardation of the CSI 500 index futures.

Third, the CSI 500 index options feature non-linear structure and can bring various strategies on back of the higher liquidity of its constitute stocks, which cover more diversified sector leaders compared with CSI 300.

What sector indices are driving most activity at CSI?

Broad-based indices such as the CSI 300, SSE 50, and CSI 500 have delivered active trading volume and become primary underliers in the Chinese financial market.

The themes of ESG and state-owned or central governmentowned enterprises have attracted growing popularity since 2022, driven by national initiatives including the carbon neutral strategy, the establishment of a valuation system with Chinese characteristics and a registration-based IPO system. Having upgraded our sector classification standards in Q4 21, and we plan to release a batch of CSI All Share Sub-Industry Indices as part of our efforts to bring more sector benchmarks and investment underliers to the Chinese market.

Solactive – scope for disruption

Solactive has become one of the leading independent providers of thematic benchmarks and is also a significant player in the industry sector space.

The German index provider has carved out its own space in the structured products market by focusing on some index categories such as industry sector and custom.

In the last two years, up to 121 different Solactive underlyings have been used as underlyings across more than 6,000 products sold in different markets with an estimated value of US$18.8 billion.

Solactive’s chief markets officer Timo Pfeiffer is of the view that the position of the ‘evergreens’ - the S&P’s and Eurostoxx’s - of the index world is primarily linked to liquidity and existing futures.

“It would be wrong to label them ‘the winners’, or to say that they are ‘coming back’ or that there is ‘a Renaissance’ because they have always been there,” said Pfeiffer. The overall market trend and development goes into more thematic indices/ baskets which is complementing the traditional broad market approach - the most popular overlays typically are high dividend structures and/or low vol, obviously to allow for pricing of options in growth structures.”

That, according to Pfeiffer, is coming back - principal protected structures linked to traditional market cap indices have

significantly picked up driven by the rise in interest rates.

“I believe that’s going to continue for the next months, maybe even years,” said Pfeiffer. “The one feature when it comes to indices that is the new kid in town, and that has seen the strongest and fastest emergence is any sort of decrement feature: be it the percentage points or index points.”

This trend originated in the French market and many other markets in Europe have followed suit, particularly for long dated autocall structures.

Liquidity issues

According to Pfeiffer, the Eurostoxx 50 and the S&P500, and then by quite some margin the Nikkei 225 will continue to be used in index-linked products because of the liquidity of their futures. IN contrast, other similar indices like the MSCI World or Solactive’s equity Global Benchmark Series are not being used as frequently for structured products for that reason.

“Liquidity means the hedge-ability with futures, which is also linked to the number of constituents,” he said, adding that the Eurostoxx 50, allows investors to buy 50 stocks as a basket and for the S&P 500, they buy the 500 biggest names in the US.

Solactive industry sector indices - sales and issuance 2021-2022

“However, a developed markets universe with 1600 stocks, MSCI World or our benchmark index is already much more difficult to trade as underlying for a structured note.”

In the ETF space the answer would be fundamentally different but for structured products that’s one of the limitations, said Pfeiffer.

Top sectors

One of the areas where Solactive has left its mark is in the industry sector space - the German index provider has several high-selling industry sector indices in the structured products market, specially in Canada which has become the biggest market for Solactive.

“Our top industry sector for sure is banks, probably with a dividend overlay. Canada is the largest market for us, and this kind of sector index has resonated with investors,” said Pfeiffer.

Another one is tech related –the Solactive US Tech 100 index which would be the equivalent of the Nasdaq equal weight.

“The rest is fragmented across the different sectors and themes specially ESG.”

Solactive has recently worked with Barclays to develop a climate transition index, developed the Solactive Paris aligned benchmark (PAB) index with BBVA, and launched a biodiversity index with Société Générale, among others.

Fuelling new themes

Industry sector index are also behind some of the most recent investment themes given their ability to provide access to structural trends changing the landscape across sectors.

“I often classify this [thematic investing] as sector 2.0, systematic investment 2.0, or the next evolution as indexing moves to a new level of granularity,” said Pfeiffer.

“To keep it simple. If I combine all the technology themes, from cybersecurity, cloud technology, AI and robotics, and put them into one large pot, I end up with the technology sector.”

According to Pfeiffer, this thematic approach allows for a narrower targeted exposure.

“If I talk about thematic indices, it is predominantly the technology space, and we need to add ESG to that as well, but for banks, for instance, we have not seen the breakdown between investment banks and merchant banks, between financial services and payment companies. Sectors can be broken down and provide new sources of thematic exposure,” he said.

Utilities and oil & gas are still the broader sectors, and indices

structuredretailproducts.com

provide the easiest and most common way to measure the performance of certain segments, particularly the technology angle and anything ESG related, such as biodiversity.

“We have developed new indices based on interesting themes coming out of industry sectors such as US critical technologies or critical infrastructure - companies that are involved in producing or protecting critical technologies, in the uncertain world we live in now is a new innovative environmental theme,” said Pfeiffer, adding that thematics coming from different industry sectors are here to stay with ESG being now part of the ecosystem.

One of the latest additions to Solactive’s pool of industry sector indices is the Solactive Whitney US Critical Technologies Index, launched in collaboration with J.H. Whitney Capital Partners –this index tracks the performance of companies that support critical emerging technologies across the US and its allies.

Innovation

When it comes to investing in industry sectors, structured products have an edge over other investment vehicles mainly because of their lower cost and speed to market.

“To me, innovation – and I must link this with flexibility – has always been easier in the structured product space, simply because the time to market is faster,” said Pfeiffer. “I could talk to an issuer today, and they bring this product next week. And if it fails, it fails. There’s less cost associated to it, rather than launching an ETF, filing a prospectus, which could take three months or more, which in terms of innovation is a long time. In the US there are also different drivers because of tax.”

This advantage, however, cannot be replicated in the market cap index space – “that’s an ETF game and to me never a structured product”.

“Looking at Timo’s portfolio, it’s full of ETFs and structured products,” said Pfeiffer. “They serve their purpose for different reasons, I hope. If I’m looking for solid long term beta exposure at the right cost, it is an ETF. However, if I want to benefit from a spike in volatility, it’s a structured product.”

Solactive has more than 550 indices deployed in the ETF market with overall assets linked to those in the region of US$80 to US$90 billion. In the structured products market, there are 200 indices underlying more than 7,000 live products – SRP data shows.

“When it comes to the number of indices, we are doing significantly more in the investment banking space, but we don’t know if the index is for a structured product or an institutional trade, said Pfeiffer. “[In any case,] the structured products market remains 100% a core space for growth and expansion for Solactive.”

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