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.  

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.

• DAX^® UCITS Capped
• HDAX^® UCITS Capped
• CDAX^® UCITS Capped

“With the launch of the DAX UCITS series, we are reacting to market needs by providing a solution that especially buy-side clients can benefit from,“ said Serkan Batir, Global Head for Product Development and Benchmarks at STOXX. “We are expanding the optionality of the popular DAX suite so users can continue to benefit from its broader ecosystem and established methodology.” 

Additionally, DAX Selection Indices with a maximum component weight of 10% were introduced: 

• DAX^® 10% Capped
• MDAX^® 10% Capped
• SDAX^® 10% Capped
• TecDAX^® 10% Capped

All indices were launched Monday, March 18, 2024.

The expanded offering was designed to help asset managers comply with established fund regulations and broaden their choice of suitable benchmark indices. As of March 18, 2024, the DAX Selection Indices’ (DAX, MDAX, SDAX and TecDAX) weight cap for individual constituents was raised from 10% to 15%. This latest change followed a market consultation and aligned the flagship German benchmarks with international practices.

All other index rules remain the same as the flagship indices. 

UCITS capping
A 4.5/8.5/35 capping method is used to comply with UCITS requirements. To arrive at it, all companies’ single weights are capped at a maximum of 8.5%. The components are then ranked from the largest to the smallest,^[2] and the top five are allowed the following maximum weights: 8.5%, 7.5%, 7%, 6.5% and 5.5% (a maximum combined weight of 35). All other components are capped at 4.5%.

^[1] The EU’s Undertakings for Collective Investment in Transferable Securities (UCITS) regulation dates from 2009 and aims to foster market efficiency in investment funds, ensure better investor information and enhance supervision of funds.

^[2] If more than one component has a weight of 8.5% after the first cap, then the original weight is used to determine the ranking order.

Regulation aimed at limiting investment risk was a key driver in the launch of exchange-traded futures and options in the past two decades. However, the trend has most recently been underpinned by asset owners’ differentiating strategies, and the tailoring of indices to target them, the panel said.

“It’s a demand-supply question,” Serkan Batir, Global Head for Product Development and Benchmarks at STOXX, said during the discussion. The buy-side is “seeking new returns and risk management” tools. “You have the benchmarks or plain-vanilla indices which have been in the space for quite a long time but now we are seeing customization in that exposure. And those are the indices that will end up having futurization,” as market participants “seek new returns, and go for more precision and niche exposures.”

_{Eurex Derivatives Forum}

The 2008 global financial crisis prompted regulators around the world to limit the risk that asset owners and intermediaries take when entering positions, boosting volumes in the listed derivatives market. The segment of dividends derivatives, in particular, was highlighted during the panel as an example where liquidity has moved on-exchange, bringing plenty of benefits to traders and investors.

Over 5 million contracts in EURO STOXX 50^® Index Dividend futures traded on Eurex in 2023, for a notional volume of EUR 72 billion. The EURO STOXX 50 is at the center of an ecosystem that includes options (including daily expirations), futures and total return futures on the index, its dividends and its volatility. About 246 million EURO STOXX 50 index futures and 253 million EURO STOXX 50 index options traded in 2023 on Eurex. The Eurozone blue-chip benchmark is also a popular underlying for ETFs, with USD 33.3 billion currently invested in the funds^[1].

Hedging risk

Speaking at the Eurex event, Wilrik Sinia, Director at Mint Tower Capital Management in Amsterdam, described how the advent of listed dividend futures dramatically changed trading, from cumbersome phone negotiations with heightened counterparty risk “to a very automated process.” 

In the past, the amount of risk taken by traders would be out of sync with the size of the trade, Wilrik said. These days, however, products such as EURO STOXX 50 dividend futures allow participants to hedge every single risk source in the market, including market, dividend, earnings and repo risk, he said.  

This targeted exposure is what makes dividend futures an “incredible” alternative to company shares, and dividends an asset class in themselves, Gabriel Messika, Head of Index Forward Trading Europe at J.P. Morgan, told the audience.

“When you have a view on the earnings of a company, it’s a lot easier and clearer to express that view with dividend futures and options other than the share price itself, which moves with a lot of other reasons than earnings,” Gabriel said. 

All speakers agreed that the more liquidity flows into on-exchange trading, the more risk market participants can take.  

The future of futurization

Lorena Dishnica, Product Manager for equity and index at Eurex, mentioned the recently launched mid-curve options on EURO STOXX 50 index dividend futures as an example of innovation. She said the exchange is looking to add so-called swaptions on single stocks, and mentioned the STOXX^® Europe 600 index as an index whose trading ecosystem could be expanded as it’s happened with the blue-chip EURO STOXX 50. In the future, derivatives could also track companies’ earnings-per-share, she added.  

Wilrik at Mint Tower and Gabriel at J.P. Morgan said they expect higher volumes and more product innovation in the total return futures market.  

‘Outsourced product developer’

As pension funds and insurers review their liabilities, Serkan at STOXX said the role of index providers has also evolved with the need to customize strategies and to bring them onto a regulated market. 

“Twenty years ago we were simply an index provider,” he said. “Now we are more of what I call an outsourced product developer.” If a client doesn’t have the resources and know-how in-house, an index provider can supply the necessary expertise to build solutions and investable products, Serkan explained. 

Today, indices are vital to the trading landscape, and they must be independent, reactive and “bullet-proof” in all market circumstances, Serkan added. 

“At the end of the day, the sell-side and the buy-side are using the index to hedge their dividend, interest rate, collateral and volatility risk, and all that is embedded into one index,” he said. “That index needs to work no matter what happens,” he said, in reference to corporate actions within constituents, such as dividend cancellations.

^[1] Source: Morningstar, data as of February 2024.

These three trends combine to drive product design as indexing takes center stage over so-called active investing.

“Indices used to be performance measurement tools,” Axel Lomholt, General Manager at STOXX, said during the panel entitled ‘Index Leaders.’ “That’s not the way the world is operating anymore. It’s moved to a hyper-customized interaction with clients. You need to build an ecosystem that can cope with that customization that clients demand.”

_{Eurex Derivatives Forum 2024}

Driven by heightened regulation, new responsible-investing objectives, and a changing macroeconomic backdrop, institutional investors are seeking solutions that are both tailored and can efficiently help them achieve their very precise targets. Most noticeable within this new paradigm has been the integration of sustainability considerations as a pillar of portfolio construction, the panel concurred.  

“We’ve moved from a framework where clients were focusing on risk and return, to focus on risk, return and the real-world impact of the portfolio,” said Axel at STOXX. “We’ve seen not only customization within an index, but clients want to have a customized ESG overlay.”

ESG 2.0

Tom Jenkins, Head of Strategy at FTSE Russell’s Index Investments Group, agreed that those impact considerations have become more deeply engrained in portfolio construction in recent years. While the first sustainability indices focused on removing controversial companies, the new generation integrates ESG considerations more positively.

“If you are very generic, ESG 1.0 was an exclusionary exercise, and we really need to have more of an inclusive exercise,” Tom said. In “ESG 2.0,” clients want indices that look at a company’s management quality, its green revenues and its sustainability performance relative to peers, and reward the impact leaders, he said. “An index that says, here is a model behavior, here is one who is in-flight, and here is one who hasn’t started the process.” 

Two immediate challenges arise from this new bespoke trend, the panel said. The first one is how to implement sophisticated methodologies without losing the transparency of indices, a key attribute underpinning the global shift of capital to index-based investments. 

“Transparency is a huge component of our collective businesses,” said Tom at FTSE Russell. “If a product is opaque, it is not helpful to the investment community. People need to understand how you reach a point in the final calculation, where the risk-reward is coming from, where the tracking error is being driven from. If you can’t articulate or show that in the public domain, it is really hard to get an option.”

“We also see increasing demand from clients,” added Maya Beyhan, Senior Director for Index Investment Strategy at S&P Dow Jones Indices. “They want to understand what goes on behind those ESG scores. ESG 1.0 was arguably more subjective, more aggregated, less detailed. Whereas now, clients want to know more.”

Investable ecosystems

A second challenge is the need to create liquid investment ecosystems around tailored indices, to help investors manage and hedge their positions.

“How do you take that customized idea and make it available to the masses?” said FTSE Russell’s Tom. “Asset owners want the completion of the ecosystem. So, it’s a push and pull all around.”

Some of those solutions have successfully progressed to exchange-traded markets. This year Eurex introduced futures on the STOXX^® Europe 600 SRI, an index with product-involvement exclusionary screens as well as filters to remove the highest-emitting companies and include those with the best ESG scores. DWS last November launched the first ETFs tracking the new ISS STOXX® Biodiversity indices, a suite that integrates nature-related risks and opportunities through a comprehensive approach. 

Diversification and 3D investing

The panel also touched upon diversification, a topic of utmost relevance these days as the traditional negative correlation between equities and bonds appears to have broken down.

As investors search for emerging asset classes to allocate capital to, index providers have been at work to determine whether those investments can be indexed with gauges that are tradable and representative of the underlying market.

Axel at STOXX said the traditional formula of investing 60% in stocks and 40% in bonds has changed to one where up to 20% is now invested in alternative assets.

“It’s a meaningful shift that impacts all of us,” said Axel. “When you look at that 20% bucket, it is crypto, private assets, infrastructure. All stuff that historically was not really the domain of index providers.”

Tom at FTSE Russell and Maya at S&P Dow Jones highlighted infrastructure, digital assets and carbon credit futures among investments that are getting more investor interest as they seek to diversify exposures.

“The big thing in diversification is: it’s not about the risk and returns of all those asset classes, but it’s how does this portfolio impact the real world?” said Axel. “It’s 3D investing. For me, that is the biggest shift we’ve seen in years.”

Overall, the panel was an excellent opportunity to hear insiders’ perspectives in an industry immersed in change and shaping the way asset owners invest their capital. Index providers have become key partners for investment institutions as the latter adapt their portfolios to modern requirements. This partnership is likely to keep fostering innovation and bringing efficiencies in asset management. 

DAX 50 ESG

No changes

DAX 50 ESG+

DAX 30 ESG

DAX ESG Target

DAX ESG Screened

No changes

MDAX ESG+

MDAX ESG Screened

DAX

No changes

Different strategies

The DAX 50 ESG combines negative screening and best-in-class ESG integration, and was developed as a broad-market ESG benchmark with a larger composition than that of the flagship DAX.¹

The DAX 30 ESG excludes controversial companies from a starting universe, and from the largest remaining companies selects the 30 securities with the highest ESG Performance Score from ISS ESG.²

The DAX ESG Target follows an optimized weighting methodology whose objective is to improve the portfolio’s ESG score and decrease its carbon footprint relative to the benchmark, while limiting the tracking error.

The objective of the DAX ESG Screened index is to reflect the performance of the DAX after removing companies that fail screenings for global norms, controversial weapons, product involvement and a minimum ESG rating.

The DAX 50 ESG+ reflects the performance of the 50 highest ESG-ranked German companies after using sustainability exclusion filters.³

The MDAX ESG indices follow similar methodologies as the DAX ESG indices while tracking mid-cap companies.

The next regular review of the DAX ESG indices will take place on June 6, 2024. 

^1,2,3 The selection universe for these indices is the HDAX®.