A new paper^[1] from Hamish Seegopaul, Global Head of Index Product Innovation at STOXX, takes on the objective of deciphering those preferences, by analyzing ETF flows but also looking through to the underlying holdings. The exercise presents a view of investors’ granular preferences, ex-post, and can be a valuable source of information that comes closer to investors’ revealed preferences, as opposed to broad ETF categories, which may be closer to their stated preferences.

The study looks at US ETFs and employs a taxonomy of preferences across style, industry and regional factors. The author creates a ‘Flow Portfolio,’ which is comprised of securities that were theoretically bought or sold each year to facilitate ETF’s net flows. Key findings in the study of Flow Portfolios are:

• There has been a high degree of year-on-year variability in style, industry and regional exposures
• There is evidence of ongoing appetite for broad-based exposure
• Over longer time horizons, there is little clear preference for specific exposures
• No matter the time frame examined, investors favored ETFs with strong in-year performances

Performance rules all preferences

Some trends are persistent over time, Hamish writes. For example, across years the Flow Portfolios show a preference for ‘more’ – more holdings and more performance – compared to the entire ETF universe. The preference for higher returns is probably of little surprise, and the paper does not imply that investors were able to capture it.

That preference also coincides with a relatively constant preference for Momentum. The factor remains somewhat of an outlier, as all other styles show a degree of variability year after year (although that variability mostly disappears when measured over time). Sectors and regions exposures preferences, too, change over time but are fairly neutral over the long run.

“In the short run, preferences can be highly variable,” Hamish writes. “In the long run, there is one preference to rule them all – and that is performance.”

One other notable shift in aggregate exposure over time is the move away from Americas-based holdings and towards EMEA and Asia/Pacific ones, the report says, a sign of diversification preference.

“These findings support a rich product landscape, however, pose challenges for the industry,” the author adds. “Some challenges – such as the ‘returns gap’ – have been sticky. Others, such as understanding preferences prior to investment decisions, will lead to further innovation.”

We invite you to download the paper and explore its methodology and results.

^[1] STOXX, “Understanding Investor Preferences through Passive Investment Flows,” February 2024. 

Since 1998, the blue-chip EURO STOXX 50^® has been the undisputed benchmark for the Eurozone and the center of a comprehensive offering of strategy sub-indices. Its pan-European equivalent, the STOXX^® Europe 50, and the broader STOXX^® Europe 600 extend the trading possibilities to the entire continent. DAX^® is the recognized benchmark for the German equity market.  

The benchmarks gained rapid adoption due to their strictly rules-based, industry-leading methodologies, serving as barometers for the region’s economic and business fortunes. From a strategic point of view, European indices offer investors an opportunity to diversify and decorrelate global portfolios.  

Figure 1: STOXX European benchmarks

_{Source: STOXX. Data as of April 19, 2024.} 

Comprehensive investable ecosystem

The EURO STOXX 50 is the most-followed benchmark for European equities. The index tracks the Eurozone’s Supersector leaders, offering a distinctive and diversified business exposure, and covers 11 national markets. A suite of index-based strategies around the benchmark allows investors to target specific objectives in the Eurozone equity market, including dividends, volatility and sustainability goals (Figure 2). The broader EURO STOXX and STOXX Europe 600 benchmarks also offer sector strategies.

Figure 2: EURO STOXX 50 index families

STOXX indices play an important role in ETF, derivatives and structured products markets

All STOXX indices are rules-based and transparent, representative of the underlying market, and investable. These are attributes that have attracted issuers to the indices as underlying for a wide range of products that help investors efficiently access the European equity market, hedge and manage portfolios, and channel liquidity to equity markets (Figure 3). Some highlights are: 

• ETFs and mutual funds: STOXX benchmarks and their derived strategies underlie EUR 64 billion in ETFs, with over 100 funds managed by 18 investment firms.^[1] Separately, more than EUR 40 billion invested in mutual funds are benchmarked to the EURO STOXX 50 and STOXX Europe 600 indices.^[2]
• Derivatives: Nearly 70 million STOXX and DAX index futures and options contracts were traded per month on Europe’s leading derivatives exchange Eurex in 2023, with EUR 1.6 trillion in capital open interest at the end of the year. The EURO STOXX 50 is the most popular underlying at the derivatives exchange. 
  Sector strategies are also popular in the derivatives market, with the EURO STOXX^® Banks index leading volumes within that category. 
  Total return futures and daily options have most recently enhanced the possibilities for investors and traders.  
• Structured products: Over 1 million structured products were issued on STOXX and DAX indices in 2022, with an 80% market share in Europe. In the strategy and custom indices category, the EURO STOXX^® Select Dividend 30 led the market with a 38% share between 2019 and 2022, according to SRP. Within market-cap indices, the EURO STOXX 50 was the most popular European underlying, while the industry sector indices segment was dominated by the EURO STOXX Banks.^[3]

Figure 3: STOXX European benchmarks – investable products

Sustainability moves to the fore

Increasing demand for responsible policies has defined institutional investing in recent years. Amid that trend, STOXX’s Sustainability indices have gained traction with investors and issuers and will continue to do so as regulators and asset owners raise the bar on issues from climate to biodiversity and social inclusion. 

STOXX’s pioneering responsible investing segment dates back to 2001. In 2018, it was expanded with the launch of the ESG-X family, versions of established indices that exclude companies based on industry and market sustainability standards. The suite yielded Europe’s first sustainability-focused futures, tracking the STOXX^® Europe 600 ESG-X index, in 2019.^[4]

That same year, the EURO STOXX 50^® ESG was introduced as a variant of the flagship Eurozone index that incorporates ESG exclusions and a best-in-class strategy. 

Figure 4: Key European sustainability benchmarks

_{Source: STOXX. Data as of April 19, 2024.}

Benchmarks as a starting universe for customized strategies

Driven by increased regulation, new responsible investing requirements and evolving investor needs, institutional clients, asset owners and product issuers are seeking solutions that can efficiently achieve very precise targeted investment objectives. This calls for co-developing indices in a hyper-customized interaction with clients. 

Many of those collaborations have resulted in innovative solutions in exchange-traded markets. In September 2023, BlackRock introduced an iShares ETF tracking the EURO STOXX 50 ESG. The DAX^® 30 ESG index, a benchmark of Germany’s large-caps with the highest ESG scores, was licensed to DZ BANK in February 2024 to issue certificates.

Benchmarks play a vital role as performance measurement tools but increasingly serve as the base upon which to serve the tailored requirements of clients, without losing the accuracy, transparency and reliability of indices.

The range of tradable products around STOXX benchmarks will continue to grow as clients choose to access the market in their preferred ways, further underpinning the liquidity, flexibility and resilience of the investment ecosystem.

Related articles

Europe’s ‘GRANOLAS’ overtake US ‘Magnificent Seven’ in performance

STOXX introduces DAX indices with UCITS-aligned and 10% stock weight caps

EURO STOXX 50 profile transformed by technology stocks’ ascent

^[1] Source: STOXX, data as of February 2024.
^[2] Source: Morningstar Direct, data as of February 2024.
^[3] Source: SRP, Index Report 2023.
^[4] Other available sustainability derivatives tied to the EURO STOXX 50 and STOXX European benchmarks include those tracking the EURO STOXX 50® ESG, EURO STOXX 50® Low Carbon, STOXX® Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco, and STOXX® Europe ESG Leaders Select 30.  

Benchmark three-month copper prices on the London Metal Exchange have risen 10.5% in 2024 to the highest since June 2022, and are up nearly 20% since a low in October last year.^[1] Several drivers have this year led to forecasts for tighter supply and increased demand — from mining shortages, to stronger Chinese consumption and reduced output, faster-than-expected US inflation and a new embargo on exchange trading of Russian copper. 

Figure 1: Copper price in London

_{Source: LME. Price for 3-month delivery.} 

More broadly, the copper market has reacted to increasing expectations that the global economy has avoided a “hard landing” recession, bolstering the outlook for a commodity that’s key in factories, energy, data centers and in the rollout of electric vehicles. Analysts predict the red metal has entered a “secular bull market” that may lift its price to a record, from USD 9,402/ton on April 12.^[2]

“The strong performance of the industrial metals complex over the year so far is a trend we expect to gather momentum ahead,” Goldman Sachs analysts Nicholas Snowdon and Lavinia Forcellese wrote in a research note on April 15.^[3] “This view particularly resonates with copper and aluminium, given the unprecedented fundamental shortfalls facing both metals over the next three years.”

“While the apparent troughing in the global industrial cycle presents a broadly supportive demand factor, it is only for copper and aluminium that fundamentals present a structural extension in bull market, tied to a combination of high green transition demand leverage, underinvested predominantly long-cycle supply dynamics, and already extremely low inventory cover,” the analysts added. 

Goldman Sachs expects copper prices to reach USD 12,000/ton in 12 months, underpinned by “a significant deficit phase from Q2 onwards until year-end.”

Figure 2: Quarterly and yearly copper balance (Goldman Sachs)

_{Source: Goldman Sachs Global Investment Research, BNEF, Woodmac, ICA, ICSG. Kt = thousands of tons.}

Stock rally

Investors have responded to rising metal prices by snapping up the shares of copper miners. The STOXX^® Global Copper Miners index rose 16.3% in March,^[4] its strongest monthly showing in three years and the highest return among 35 STOXX Thematic indices (Figure 3). In the past year, the gauge has gained 14%. 

Figure 3: 1-year and 1-month performance of STOXX Thematic indices

_{Source: STOXX. Gross returns in USD.} 

The STOXX Global Copper Miners index was introduced last year and tracks companies with the highest revenues from, and largest market share in, mining the metal. 

The index underlies the iShares Copper Miners UCITS ETF from BlackRock, launched in EMEA last year, which led gains among all copper equities ETFs in the month through April 10 according to Trackinsight data.^[5]

Figure 4: STOXX Global Copper Miners index 1-year return

_{Source: STOXX. Gross returns in USD.} 

In an interview in January this year, Omar Moufti, Thematics and Sectors Product Specialist for iShares EMEA, said the mining segment may face long-term supply shortages after multiple years of underinvestment. Besides this industry backdrop, Omar explained, there are fundamental drivers for so-called essential metals such as copper, particularly linked to the transition to a low-carbon economy and the related need for electrification.

“There are important constraints that have led or could lead to a large supply-demand gap” in copper and lithium, Omar said at the time. “If the forecasted demand for the metal increases, the limited potential for supply to follow suit paints a constructive backdrop for metal prices, and thus miners.”

BlackRock has also launched in EMEA the iShares Lithium & Battery Producers UCITS ETF, tracking the STOXX^® Global Lithium Miners and Battery Producers index.

The STOXX copper and lithium indices offer focused strategies within the broader metals and mining industry segment. Still, they remain diversified: over 30 companies in the case of the copper index. They allow investors to tap growing demand for metals and the rising profitability of miners, presenting an alternative to buying the underlying commodities or their derivatives.

Figure 5: STOXX Global Copper Miners index – Top 10 holdings

_{Source: STOXX. Data as of April 15, 2024.}

Economic upside

Copper is proving its status as a proxy for global growth. China’s manufacturing activity expanded at the fastest pace in 13 months in March, while that in the US grew last month for the first time in 1-1/2 years. 

According to Goldman Sachs, copper prices have historically risen 25% on average in the 12 months after a trough in global manufacturing indicators. 

Given the outlook for undersupply in the market, the prospect for lower interest rates and signs of a resurgent Chinese economy, the strong performance of copper this year may be more than justified. For investors, targeting the shares of specialized miners may be an efficient way to capture the upside of a world hungry for essential metals.  

^[1] Data through April 12, 2024.

^[2] “Bulls jump deeper into copper amid supply challenges, AI-fueled demand,” Reuters, April 15, 2024.

^[3] Goldman Sachs Commodities Research, “Metals Comment: Assessing the LME Russian ban impact,” April 15, 2024.

^[4] Gross returns in USD.

^[5] Source: ETF Stream, “Copper shortage leads surge in mining ETFs.”

The name, coined by Goldman Sachs in 2020, is an acronym for a group of 11 companies that stand out for strong earnings growth, low volatility, high and stable profit margins, and solid balance sheets, according to the investment bank (Figure 1). They account for a combined 21% of the STOXX^® Europe 600^[2] but were responsible for 60% of the benchmark’s gains in the past year,^[3] and have even beaten the Magnificent Seven on a risk-adjusted basis. Their characteristics are likely to predominate in the current economic cycle, the investment bank’s strategists say. 

Figure 1: The GRANOLAS

_{Source: STOXX. Data as of March 28, 2024.} 

Their average market capitalization is approximately EUR 250 billion. Unlike the Magnificent Seven, they are a diversified cohort, drawn from the Healthcare, Technology, Consumer Staples and Consumer Discretionary ICB Industries. The Magnificent Seven are mostly Technology stocks, except for Amazon and Tesla, which are Consumer Discretionary.

Figure 2: Group performance in past year and contribution to STOXX Europe 600 returns

_{Source: Goldman Sachs, “The Magnificent GRANOLAS,” February 12, 2024.}

The GRANOLAS have jumped more than 60% as a group since January 2021, matching the performance of the Magnificent Seven, Goldman Sachs’ calculations show. However, they accomplished this with lower volatility. Unlike their US counterparts, the European group avoided the sharp sell-off of 2022, when investors fretted about quickly rising interest rates (Figure 2). 

Figure 3: Steady rise

_{Source: Goldman Sachs, “The Magnificent GRANOLAS,” February 2024.}

“From a portfolio construction point of view, the GRANOLAS can help to boost the Sharpe ratio and mitigate risks as volatility picks up,” a team of Goldman Sachs strategists including Guillaume Jaisson and Sharon Bell wrote in a report on February 12, 2024.^[4] “If we were to enter a high vol regime, we believe the GRANOLAS would be well insulated relative to the market, as they have been in the recent past.”

The realized volatility of the GRANOLAS is on average twice lower than that of the Magnificent Seven, according to Goldman Sachs. 

Thanks to their large share of overseas earnings, the GRANOLAS were the main reason why the STOXX Europe 600 posted double-digit gains in 2023 despite lackluster economic growth in the region.  

Quality growth

Their business characteristics make the GRANOLAS a quality and defensive trade in Europe, according to Goldman Sachs. Figure 3 shows the GRANOLAS’ positive correlation with those two styles. Quality was the second best-performing style globally in the 12 months through February, according to the STOXX Factor indices, only beaten by Momentum.

“This type of company has tended to outperform when growth slows,” the strategists wrote.

Figure 4: Correlation with Growth and Defensive styles

_{Source: Goldman Sachs, “The Magnificent GRANOLAS,” February 2024.}

ASML, the Dutch company whose lithography machines are used to make chips, on January 24 reported that sales jumped 30% in 2023 from the year earlier. Booming revenue has also lifted the shares of Novo Nordisk, the company behind the Ozempic and Wegovy drugs, and LVMH, the maker of Louis Vuitton handbags and Tiffany’s jewelry. Both are now among the world’s top companies by market capitalization.

Capturing flows

Because of their size, the GRANOLAS also stand to capture the biggest share of flows amid the structural shift towards passive investment, according to Goldman Sachs. The bank’s research shows that the GRANOLAS tend to outperform when ETFs see more inflows than actively managed funds. Another benefit is that the GRANOLAS are among the most liquid companies in Europe, an attribute sought by large, US-based institutions.

Finding the right theme in the cycle

At a broad index level, European stocks may be behind the returns of other markets such as the US, dominated by uber-growth technology shares. However, Goldman’s analysis shows that an important part of the European market has similar growth characteristics, but at lower volatility levels than the popular, more cyclical stocks that dominate news headlines. That segment could provide above-average returns particularly in a market where economic growth is scarce and should volatility pick up.

^[1] Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla.

^[2] Data as of March 18, 2024.

^[3] Source: STOXX. Price data in USD from February 9, 2023 to February 9, 2024.

^[4] Goldman Sachs, “The Magnificent GRANOLAS,” February 2024.

The global benchmark jumped 3.2% last month when measured in dollars and including dividends^[1], for a 9% advance in the first quarter. It added 3.4% in March when measured in euros. The STOXX^® World AC index rose 3.1% in the month.

The Eurozone’s EURO STOXX 50^® added 4.4% in euros, while the pan-European STOXX^® Europe 600 advanced 4.2%^[2]. The STOXX^® North America 600 gained 3.1% in dollars, while the STOXX^® USA 500 rose 3%. The STOXX^® Asia/Pacific 600 climbed 2.3% in dollars. The STOXX^® Developed World rose 3.2% and the STOXX^® Emerging Markets gained 2.2%.

Figure 1: STOXX Benchmark indices’ March risk and return

_{Source: STOXX. Gross returns. Data as of March 28, 2024.}

Figure 2: STOXX Equity World indices’ March risk and return

_{Source: STOXX. Gross returns. Data as of March 28, 2024.}

Germany’s DAX^® rose 4.6% in the month. MDAX^®, which gauges the performance of German mid-caps, increased 4.7%. 

No hard landing

The US added 275,000 jobs in February, the government reported on March 8, more than the 200,000 openings that had been expected on average by economists.^[3] In the Eurozone, Purchasing Managers’ Indices for February released in March suggested the industry sector is rebounding from a period of stagnation.^[4] A string of economic reports has bolstered expectations that the global economy has avoided a recession amid high interest rates.  

Figure 3: Total annual % returns for STOXX World AC index

_{Source: STOXX. Gross returns.}

Figure 4: Select STOXX benchmarks’ returns since 2023

_{Source: STOXX. Gross returns in dollars except for STOXX Europe 600 Index, which is in euros. Data from Dec. 30, 2022, to March 28, 2024.}

Volatility little changed 

The EURO STOXX 50^® Volatility (VSTOXX^®), which tracks EURO STOXX 50 options prices, fell to 13.4 at the end of last month from 13.8 in February. A higher VSTOXX reading suggests investors are paying up for puts that offer insurance against stock price drops. The VDAX-New^®, which measures volatility in German equities, eased to 12.8 from 12.9 in February. 

Factor investing

The Momentum signal ruled across geographies for a second straight month, according to the STOXX Factor indices (Figure 5). The Low Risk factor repeated February’s position at the bottom of the group.

Figure 5: STOXX Factor (Global) indices’ March risk and return characteristics

_{Source: STOXX. Gross returns. Data as of March 28, 2024.}

Climate benchmarks

Among climate benchmarks, the STOXX^® Global 1800 Paris-Aligned Benchmark (PAB) rose 1.6%, as did the STOXX^® Global 1800 Climate Transition Benchmark (CTB). The PAB and CTB indices follow the requirements outlined by the European Commission’s climate benchmarks regulation.

Sustainability indices

The STOXX^® Global 1800 ESG-X index gained 2.9% in the month. The STOXX^® ESG-X indices are versions of traditional, market-capitalization-weighted benchmarks that observe standard responsible exclusions. 

Within indices that combine exclusions and best-in-class ESG integration, the EURO STOXX 50^® ESG index rose 4.7%. Germany’s DAX^® 50 ESG index (+4%), which excludes companies involved in controversial activities and integrates ESG scoring into stock selection, lagged the benchmark DAX’s return in the month.

The STOXX^® Global 1800 SRI advanced 3.8%. The STOXX SRI indices apply a rigorous set of carbon emission intensity, compliance and involvement screens, and track the best ESG performers in each industry group within a selection of STOXX benchmarks. 

Finally, the DAX^® ESG Screened added 3.9% in the month. The index reflects the composition of the DAX benchmark minus companies that fail to pass norms-based and controversial weapons screenings, meet minimum ESG ratings or are involved in certain business activities considered undesirable from a responsible investing perspective. 

Thematics, dividend strategies

Only nine of 35 STOXX^® Thematic indices outperformed the benchmark STOXX Global 1800 last month. The STOXX^® Global Copper and Metals Mining (16%) and STOXX^® Global Copper Miners (16.2%) indices stood out with double-digit gains in the month.  

Dividend strategies rebounded from two months of losses. The STOXX^® Global Maximum Dividend 40 (+4.1% on a net basis) selects only the highest-dividend-yielding stocks. The STOXX^® Global Select Dividend 100 (+3.9%) tracks companies with sizeable dividends but also applies a quality filter such as a history of stable payments.

Minimum variance

Minimum variance strategies failed to match the benchmarks’ returns last month against the market’s bullish backdrop. The STOXX^® Global 1800 Minimum Variance rose 2.7% and the STOXX^® Global 1800 Minimum Variance Unconstrained added 2.6%. 

The STOXX Minimum Variance Indices come in two versions. A constrained version has similar exposure to its market-capitalization-weighted benchmark but with lower risk. The unconstrained version, on the other hand, has more freedom to fulfill its minimum variance mandate within the same universe of stocks.

^[1] All results are total returns before taxes unless specified.

^[2] Throughout the article, all European indices are quoted in euros, while global, North America, US, Japan and Asia/Pacific indices are in US dollars.

^[3] FT, “US jobs figures beat forecasts but downgrades complicate outlook,” March 8, 2024.

^[4] Reuters, “Euro zone business activity moves closer to recovery, PMI survey shows,” March 5, 2024.

A webinar organized by IPE was the stage to discuss the new paradigm in the way investors look at digital assets. It was also an opportunity to explore the recently launched STOXX^® Digital Asset Blue Chip index, which offers exposure to high-quality assets that represent the crypto universe today. 

“We are entering the era of digital assets maturity,” Loris Voneschen, Head of Index Business at Bitcoin Suisse, said during the broadcast. “The space is migrating towards more tangible use cases and less fixation on price volatility and speculation.” The amount of assets available and heightened interest from investors and institutions in the last couple of months “underly the importance of being able to navigate the digital assets space with know-how and experience,” he said.

_{Source: IPE webcast. Clockwise from top left: Ladi Williams at STOXX, Brendan Maton (moderator), Loris Voneschen from Bitcoin Suisse, Valour’s Johanna Belitz.}

New rules and inflows

The approval of the first spot bitcoin exchange-traded funds (ETFs) in the US this year has triggered a dash to invest in cryptocurrencies through regulated and transparent vehicles. The ten US spot bitcoin ETFs launched in January 2024 have attracted record inflows and have amassed total assets of nearly USD 50 billion.^[1] With more clarity in the regulatory landscape, many institutional investors are starting to include cryptocurrencies within their multi-asset funds. 

Johanna Belitz, Head of Nordics at Valour, which has recently introduced an exchange-traded product (ETP) listed on the Frankfurt Stock Exchange (FSE) tracking the STOXX Digital Asset Blue Chip index and using Bitcoin Suisse as crypto data provider, said the digital assets market is currently undergoing a “demand shock.” She estimated during the panel that demand for bitcoin is running at about ten times the amount that is actually being mined.

Amid such uptake, a blue-chip index can bring transparency, help standardize prices and enable institutional-level investment products in a quickly evolving and emerging market that was until recently little regulated, said Ladi Williams, Head of Thematic and Strategy Index Product Management at STOXX. There are over 2 million digital assets trading in more than 700 venues, according to CoinMarketCap. 

“An index is an important tool that allows us to measure, understand and participate in a particular asset class or segment,” said Ladi. “In order to do that, an index has to have certain characteristics: it has to be representative of the asset class or segment, it needs to be rules-based and transparent, and if the intention is for it to underlie an investment product, it has to be investable.”

A quality focus

The STOXX Digital Asset Blue Chip index was designed with a focus on quality, rather than market capitalization as it is customary with other indices. The index considers crypto-native metrics including age, total value scored, developer community, active addresses and economic activity.

The list of eligible assets for the index is derived from the Bitcoin Suisse Index Reference Classification List (xRCL). Basic screening criteria trims the universe, with assets in the following five sectors from the Bitcoin Suisse Global Crypto Taxonomy (GCT) (Figure 1) then available for selection: Cryptocurrencies, General Purpose Smart Contract Platforms, Decentralized Finance (DeFi), Utility and Culture. 

Figure 1: Bitcoin Suisse Global Crypto Taxonomy

_{Source: Bitcoin Suisse. The ‘Tokenized Asset’ Sector is ineligible for the STOXX Digital Asset Blue Chip index, as is the ‘Privacy Coin’ Sub-sector.}

“The primary objective of the Bitcoin Suisse Global Crypto Taxonomy is to make the space more accessible for investors and the larger expert audience by offering a systematic structuring of the crypto industry,” explained Loris at Bitcoin Suisse.

Index constituents are selected in a screening process that considers the five crypto-native metrics mentioned earlier to rank assets in relation to their peer group. Those metrics give an idea of the quality, adoption, utility and financial strength of digital assets, in the same way metrics such as revenue and market capitalization define blue chips in the equities space.

Each digital asset gets an aggregated score based on those metrics, and those with the highest scores by sector make it into the index. This selection strategy draws parallels to the constitution of the flagship EURO STOXX 50^®, which is also comprised of Supersector leaders.

The index is finally weighted by market capitalization with a maximum cap of 30% at each quarterly review. This offers investors a true representation of the underlying market as well as exposure to smaller assets, but seeks to limit concentration in a few, dominant ones.

Figure 2: STOXX Digital Asset Blue Chip index methodology summary

_{Source: STOXX.}

Top holdings

The discussion turned towards the holdings in the STOXX Digital Asset Blue Chip index. The selection and weighting methodology seeks to capture the full opportunity set for investors in such a broad market, explained Ladi at STOXX. 

“A key characteristic of an index is its representativeness of the market,” Ladi said. “Bitcoin and Ethereum represent 70% of the market. These tokens’ weights (in the index) represent what you actually see in the market. In terms of having other assets as well, we have to be mindful of the fact that if you were to overweight those, they might not have the capacity to support the institutional inflows.”

Figure 3: STOXX Digital Asset Blue Chip index holdings

_{Source: STOXX. Holdings as of March 2024 review.} 

“There is both a diversification aspect as well as an attempt to capture bigger movements which you might not find in the top three digital assets, but lower down,” Johanna at Valour said about the index. “This is a very interesting aspect of basket or index products.” 

Exchange vetting and pricing

Pricing reliability is a big consideration for an asset class such as cryptocurrencies, which do not trade on exchanges that are as mature as traditional ones.

“It was important to make sure that the exchanges we are using for pricing have a level of scrutiny that is acceptable for our index,” said Ladi at STOXX. “That is where we lean heavily on Bitcoin Suisse’s expertise in order to come up with a pricing methodology that would reflect prices that investors are actually able to transact on.” 

Loris at Bitcoin Suisse explained that assets in the STOXX index are priced in a process that includes thorough exchange vetting. The data provider ranks crypto exchanges according to their scores based on security, legal, compliance and regulation, and financial criteria. The two highest-ranked venues measured by exchange score, adjusted for volumes and a decay-time factor, will provide the average price for the asset. Additionally, on a day-to-day basis, Bitcoin Suisse monitors the exchanges which are part of the eligible exchange universe.

Averaging the most recent traded asset prices across two sources ensures the most reliable, up-to-date and representative price. 

High returns, diversification

Towards the end, the panelists were asked about the outlook for cryptocurrencies, a hot topic given that bitcoin prices have jumped more than 70% so far in 2024.^[2] Johanna at Valour took the baton.

“We see very strong demand,” she said. “Also, we have the bitcoin halving coming up. Supply of new coins will be cut in half. It is a bigger risk to stand outside of the digital assets market than to take a position.” 

The webinar provided a great chance to understand the evolving state of play in the digital assets space and how investors can access the market through a systematic, index-based strategy that can help them navigate through the unknowns and challenges. 

^[1] Wall Street Journal, “Bitcoin Funds Pull In Money at Record Pace,” March 5, 2024.

^[2] Intraday prices through March 13, 2024.

But how can they screen out the best assets in terms of quality, financial clout and commercial activity? In other words, tokens that are akin to the blue chips of the equity world.

The STOXX^® Digital Asset Blue Chip Index was introduced last year and provides several tools for investors in the crypto world. Firstly, as a benchmark, it aims to act as a barometer of the underlying market’s behavior. Secondly, it helps navigate the space through a systematic and clear industry structuring as is the Bitcoin Suisse Global Crypto Taxonomy (GCT). The index also ensures asset price trustworthiness through a process that vets exchanges by volume and reliability. 

Finally, a comprehensive selection mechanism relies on crypto-native metrics to build a portfolio that is high-quality in the blue-chip sense, much like a similar equity portfolio will seek components with high revenues, established businesses, a large customer base and a solid balance sheet. 

Constructing a blue-chip crypto index

A new report^[2] delves into the STOXX Digital Asset Blue Chip Index’s asset selection process to unpick those metrics and understand the construction of a blue-chip benchmark in this segment. The asset characteristics considered in that process are:

Age: The age of a crypto asset helps gauge the commitment to the project and its adoption by the market.

Total Value Secured (TVS): The more value a protocol secures on its blockchain, the greater the trust, adoption and inherent applications the protocol has in securing transactions validity and immutability.

Active Addresses: The number of active addresses is used to measure adoption. This metric counts the number of unique sending blockchain addresses. 

Economic Activity: Strong fee revenue denotes usage and adoption, in addition to gauging the ongoing concern of the protocol and resilience in a competitive market landscape.

Developer Community: The developer community is a measure of innovative activity, growth and ossification at the same time. 

“Drawing direct analogies from the traditional equity markets while incorporating the intricacies of crypto is a challenge,” the report’s authors, led by Thomas Shuttlewood, Associate Principal for Product Research and Development at STOXX, write. “Blue-chip digital asset determination must consider the uniqueness of this distinct market, and must rely on criteria and fundamentals that are specific to the asset class.”

Sector leaders

For each metric, assets are assigned a score of 1 if they rank within the top 50% in their respective use-case sector: Cryptocurrencies, General Purpose Smart Contract Platforms, Decentralized Finance (DeFi), Utility and Culture. Those with a score of 4 or more are selected as constituents of the index.

Sector representation is an important consideration in benchmark creation and in representing the underlying economies and universe of the targeted asset class. To translate this notion into the digital asset space, one must rely on taxonomies that have been specifically created for this market, the authors explain. In likening crypto use cases to traditional industry sectors, one can select the leaders from each use-case sector into the index in much the same way as in the EURO STOXX 50^® design. 

Risk and returns

The authors then turn to analyzing the risk and return performance of the STOXX Digital Asset Blue Chip Index. The findings show that the index acts as a true reflection of the nature of the market, matching the average constituent return closer than any single component. In posting lower volatility than its individual components, the index’s standing as a blue-chip gauge is also enhanced. “A middling to strong returns for a relatively low level of volatility indicates that the index acted in a manner associated with a traditional blue-chip index in a defensive market regime,” the authors write.

Interest in the digital asset market is likely to continue gathering pace, so transparent and reliable data is vital. The space must be considered with the same respect as other asset classes, while still ensuring that its intricacies are included in the equation, the authors argue. An investment vehicle and market barometer in the shape of a blue-chip index allows this to happen. 

We invite you to download the report and explore its findings.

^[1] Source: CoinMarketCap.

^[2] “STOXX Digital Asset Blue Chip Index: A Benchmark for the Crypto World,” STOXX, March 2024.

The index, which marked STOXX’s entry into the digital assets space, has been developed in partnership with crypto-financial services provider Bitcoin Suisse. It aims to track a diversified and high-quality basket of assets, utilizing crypto-native metrics to select those that serve as a reflection of the crypto universe today.

Changing backdrop

More institutions are turning to digital assets for strategic objectives such as portfolio diversification, and as an enhanced ecosystem and clearer regulation make market fundamentals more attractive to a larger breed of investors. After a bout of market volatility in 2022, asset prices recovered in 2023, and the crypto market is now valued at USD 2.5 trillion^[1].

“Investors are clearly allocating significantly more to alternative asset classes to diversify their portfolios,” said Axel Lomholt, General Manager at STOXX. “That’s why we are moving into an investment segment that’s increasingly gaining a foothold in portfolios. With Bitcoin Suisse, we do this with an established partner and with an index methodology designed to meet the robustness needs of today’s investors.”

Selection process

Assets in the STOXX Digital Asset Blue Chip X are derived from the Bitcoin Suisse Index Reference Classification List (xRCL) and must be eligible for the FSE’s Xetra venue. Only assets in the following five sectors from the Bitcoin Suisse Global Crypto Taxonomy (GCT) are currently available for selection: Cryptocurrencies, General Purpose Smart Contract Platforms, Decentralized Finance (DeFi), Utility and Culture.^[2] Selection is based on a multi-step procedure that seeks to identify the strongest and most representative assets in each eligible sector.

A blue-chip focus means the new index does not just select the largest crypto assets by market capitalization, as is customary with other indices, but instead considers crypto-native metrics including the scope of adoption, the size of the developer community, the fees paid by users and the age of the protocol. This, together with robust exchange-based pricing, ensures the investable tokens present quality standards that are acceptable to a larger pool of investors.

A market capitalization weighting scheme with a cap of 30% limits exposure to dominant tokens — such as Bitcoin and Ethereum currently — while keeping the strategy representative of the underlying market. Weights are capped at 30% in each quarterly review, meaning any asset that exceeds that threshold will be cut back in the following rebalance. 

For more details on the index and its constitution, visit a blog from December. 

Figure 1: Index holdings

_{Source: STOXX. Data as of the March 2024 review.}

^[1] https://coinmarketcap.com/

^[2] The Cryptocurrency sector contains blockchains with the primary purpose of being a form of cryptographically secured digital money. The General Purpose Smart Contract Platform sector contains blockchains that offer functionality ‘beyond money’, usually in the form of decentralized applications consisting of smart contracts that utilize the native coin of the blockchain. The DeFi sector contains smart-contract-based protocols that may operate on their own or another blockchain and are powered by a native token. The Utility sector contains blockchains and protocols that enable access to, or represent, a resource. The resource does not have to be digital. The Culture sector contains blockchains or protocols that represent cultural works of art – as opposed to utility. A sixth sector in the taxonomy, Tokenized Assets, is currently not covered in the index methodology. This sector contains blockchains and protocols to manage tokenized versions of asset classes or instruments of traditional finance.

The STOXX Semiconductor 30 Index is comprised of US-listed securities issued by companies classified within the Semiconductors and Production Technology Equipment ICB Subsectors. The stocks are ranked by free-float market capitalization and the top 30 make it into the index. Constituents are weighted by size, with a single-stock cap at the time of reweighting of 8% and a 45% combined weight limit for companies with an individual weight of over 4.5%. 

Chipmakers have been at the center of the latest equity market rally, driven by strong demand for semiconductors, in particular from developers of artificial intelligence technologies. Nvidia, the largest component in the STOXX Semiconductor 30 index, last month reported that fourth-quarter revenue rose 265% from a year earlier, beating analysts’ forecasts. CEO Jensen Huang said that “the conditions are excellent for continued growth.”^[1] The company’s shares have risen nearly 500% since the start of 2023.^[2]

According to McKinsey, global semiconductor sales may grow to USD 1 trillion by 2030 from USD 600 billion in 2021.^[3] About 70% of growth is predicted to be driven by three industries: automotive (particularly electric vehicles), data storage (AI and cloud computing) and wireless (smartphones, 5G).

“The STOXX Semiconductor 30 Index represents the leading companies within a rapidly flourishing industry, all meticulously selected through a rules-based and transparent methodology,” said Axel Lomholt, General Manager at STOXX. “Our collaboration with Eurex signifies a terrific opportunity to further enrich the derivatives market, particularly in connection with themes and sectors, leveraging our innovative index-based solutions.”

Figure 1: Index performance

_{Source: STOXX. Data as of January 31, 2024.}

Figure 2: Top ten holdings

_{Source: STOXX. Data as of March 11, 2024.} 

^[1] CNBC, “Nvidia posts revenue up 265% on booming AI business,” February 21, 2024.

^[2] Data through March 4, 2024.

^[3] McKinsey, “The semiconductor decade: A trillion-dollar industry,” April 1, 2022.