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.

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. 

Our company started operations in 1998 with the launch of the EURO STOXX 50^®, as electronic trading of equities and derivatives was gathering pace, and the introduction of the euro was still nearly a year away. The index quickly became the undisputed benchmark for Eurozone blue-chips and a barometer for the region’s economic fortunes. The creation of this benchmark and of its pan-European sibling, the STOXX^® Europe 50, would pave the way for the launch in April 2000 of Europe’s first ETFs, listed at the Frankfurt Stock Exchange. 

Today, we calculate more than 17,000 rules-based and transparent indices under the STOXX and DAX brands, licensed to more than 550 companies globally. These indices are used for benchmarking purposes by the world’s largest investment institutions. They also underlie some of the most liquid futures and options. And they’re the top choice for issuers of structured products.  

Since day one, our indices gained rapid adoption due to their strictly rules-based and reliable methodologies. We have built a robust legacy with the most widely traded European benchmarks, whose unique and extensive ecosystem of funds, listed derivatives and structured products helps investors efficiently hedge and manage portfolios. 

We are the No.1 provider of underlyings for equity index contracts at Eurex, the largest European derivatives exchange. Today, over 3 million contracts on STOXX and DAX indices change hands per day at the exchange, allowing market participants of all sizes to achieve their desired exposures and manage their investment liquidity.

European heritage, global footprint

Through the ups and downs of the European economy over the past 25 years, the EURO STOXX 50, STOXX^® Europe 600 and DAX^® tracked the fate of the region’s largest companies. Our indices quickly acquired a global footprint, too: the STOXX^® Global 1800 Index became a popular benchmark, and in 2022 we introduced the STOXX World Equity indices. This new suite allows investors to slice and dice the world’s equity markets in a modular way, with a consistent methodology and international standards – leaving no coverage gaps or overlaps.

Sustainability moves to the fore

We have also expanded to sector, volatility, dividend and smart-beta strategies, developing some of the most groundbreaking indexing solutions.

Excitingly, the pace of innovation hasn’t slowed down, as seen with new factor-based and thematic index offerings. And increasing demand for responsible investing has led to the introduction of a comprehensive family of ESG & Sustainability indices that cater to diverse objectives. The indices have gained huge traction with investors and issuers in the past decade, and will continue to do so as regulators, investors and pensions trustees raise the bar on issues from climate to biodiversity and human rights. 

The EURO STOXX 50^® ESG, for example, is a variant of our flagship Eurozone index that incorporates ESG exclusions and a best-in-class strategy. In July, BlackRock unveiled an iShares ETF that replicates the index. This is the latest addition to a pioneering responsible-investing segment, which already yielded the industry-first regional sustainability-focused futures, tracking the STOXX^® Europe 600 ESG-X index, in 2019. 

New technologies

As our products have evolved, our role as a company has changed along the way. Thanks to the explosion in alternative data that few imagined 25 years ago, and the consequent growth in systematic and quantitative investing, STOXX is not just an index provider, but an intelligent investments hub and innovation center.

Innovation has broadened our possibilities, enabling “smart” indices that fit bespoke mandates. With access to the most nuanced data from leading providers, and deep risk and factor exposure analysis from our partners at Axioma, we enable users to optimize their indexed portfolios — controlling for risk, returns and sustainable impact. The extraordinary progress of artificial intelligence this decade has expanded our capabilities in portfolio construction and stock selection.

Yet our mission hasn’t changed: to design powerful products, partnering with investors to tackle with precision their very specific challenges and opportunities in an ever-interconnected global economy. An open architecture that allows us to team up with the best data providers for each case gives us an edge that many of our competitors don’t have. That’s what we hear from clients and partners: they appreciate that we adapt to their needs but at the same time we uphold the accuracy, reliability and neutrality of our indices — from design to maintenance. Despite their inventiveness, all of our index solutions remain representative of the underlying market, transparent and tradeable. 

While we are a leader in many segments and regions, we are a challenger in others. This requires us to stay competitive, anticipate changes, and make informed decisions. Being flexible in our offerings, adapting our products and considering clients’ unique needs are fundamental. 

Combination with ISS 
Just a few days ago, we took another step in our ongoing transformation journey. Our parent company, Deutsche Börse, has combined STOXX with Institutional Shareholder Services (ISS), a leading provider of ESG data, analytics and insight. STOXX and ISS have been close partners for many years, and the combination of sophisticated index know-how, market intelligence and ESG data is a perfect fit.  

Under the ISS STOXX umbrella will sit the STOXX index business together with ISS Governance, ISS ESG, ISS Corporate Solutions and ISS Market Intelligence. Combining ISS’s robust and varied ESG and governance datasets with STOXX’s deep expertise in index construction will significantly strengthen the overall offering of solutions and enhance the possibilities for clients. 

When passive investing turns active 

Our growth has come alongside the multi-decade boom in index investing. The adoption of index-based vehicles such as ETFs has been underpinned by the multiple benefits of low cost, transparent methodologies and rules, as well as intra-day pricing and trading. Those features have made of the ETF the most efficient and favored instrument for direct investments. From a low base two decades ago, assets under management in ETFs now represent 29% of investments in active mutual funds. If one adds index-tracking mutual funds, the ratio climbs to 50% of capital invested in active funds.  

At the same time, targeted strategies and customization mean that indices increasingly provide an active rather than passive investment option. The expanding functionality of such indices is likely to keep lifting the ETF universe to greater trading volumes and assets under management. 

The ETF space will continue to grow as it finds new markets and applications. The objectives, construction and uses of our indices will keep changing. But whatever new products emerge, STOXX will be at the front line of change.

If the pace of change since 1998 is any guide, the next 25 years promise to bring even more innovation to the world of STOXX indices. We look forward to the next step in this journey with our clients, partners and stakeholders in the public markets.

At the event on July 11, representatives from STOXX, ISS ESG and DWS discussed how biodiversity considerations are gaining ground among investors and regulators. They also examined the recently launched ISS STOXX^® Biodiversity indices as a framework to embed those considerations in investment portfolios. 

“More and more investors are recognizing the potential financial materiality of biodiversity loss, which can be characterized as risk,” Frederike Bauer, Product Specialist for Xtrackers at DWS, which oversees more than EUR 840 billion in assets under management, said during the talk. Clients are asking how they can integrate biodiversity risk into portfolios, and what and how can be measured in that sense, she added. “Biodiversity is an emerging topic and is probably at a stage where climate was a few years back, where we were asking the same questions there.” 

Resource exploitation, climate change, pollution and the introduction of invasive species are among the main drivers behind the rapid degradation of the world’s land and water. In a 2021 article on this blog, we discussed biodiversity’s relationship with climate change, the related regulatory landscape and challenges with data, and why investors should care. In a follow-up article last December, we provided an update on the extreme deterioration of our nature systems.

Core solution and holistic framework

To address those concerns was a driver behind the creation of the ISS STOXX Biodiversity indices, said Antonio Celeste, Director for Sustainability Product Management at STOXX. 

“Investors wanted to have a solution that was designed for the core of their portfolios and that at the same time took into account a broad biodiversity framework with a holistic approach,” Celeste explained to the audience.

That approach rests on four pillars, called “Avoid,” “Minimize,” “Enable” and “Decarbonize” (Figure 1). The first one excludes companies involved in products or actions that harm biodiversity, such as pesticides. The second one selects companies with the best scores in a Potentially Disappeared Fraction of Species ratio (PDF). The “Enable” screen selects companies with the highest exposure to selected biodiversity- and climate-related SDGs. Finally, the fourth pillar seeks to achieve a 30% carbon footprint reduction in the portfolio relative to the starting universe.

Figure 1: ISS STOXX Biodiversity indices framework

_{Source: STOXX.}

Hernando Cortina, Head of Index Strategy at ISS ESG, described the methodology and spirit behind the two key metrics employed in biodiversity analyses and assessed by his company: PDF and Mean Species Abundance (MSA). PDF represents the potential decline in species richness in an area over a period due to unfavorable conditions associated with environmental pressures. MSA reflects the change in the number of species, i.e., the relative abundance within each endemic region compared to a pristine state.

“We start by analyzing the activities of a company in its operating locations, then model its supply chain and inputs,” Cortina said. “That goes into various impact models that provide us PDF and MSA. All of this is estimated data. There is very little disclosure at this time. We are relying on well-established life-cycle and input/output models.”

Figure 2: ISS ESG’s methodology for assessing companies’ biodiversity impact

_{Source: ISS ESG.}

“Biodiversity has always been a key concept within the ‘E’ of ESG and is essential to environmental conservation,” added Cortina. “What is new now is the ability to model and quantify a company’s and its supply chain’s impact on biodiversity.”

Portfolio considerations

Celeste from STOXX explained that a biodiversity lens will lead to some deviations from a benchmark, as it happens with any other sustainability strategy. In that sense, investors can rely on an optimizer to obtain the maximum impact possible given specific constraints. 

“It’s all about index construction,” Celeste said. “There are some biases that are implicit. When we think about a broad solution, biases are lower, but when we think of a darker green solution, the sector biases are larger. Here again, the methodology can be customized, and you can optimize some targets versus, for example, tracking error.” 

Celeste and Cortina coincided that the ISS STOXX Biodiversity framework is a starting point rather than a destination. The indices are meant to be an engagement tool with companies, which may lead to more corporate disclosure on biodiversity and to enhanced metrics.

Regulators turn to biodiversity issues

Regulation is also due to play its part in improved company reporting, the panel said, as authorities increasingly turn their attention to the problem of a deteriorating natural capital. Bauer of DWS mentioned the Taskforce on Nature-related Financial Disclosures (TNFD) framework as a set of rules that may speed up the availability of biodiversity information from companies. 

“That will bring forward reporting on biodiversity for companies on a voluntary level but also perhaps on a mandatory level,” Bauer said. “There may also be more harmonization going forward in terms of reporting,” she added. 

Cortina and Celeste explained that the ISS STOXX Biodiversity framework aimed to comply with the spirit of the TNFD as well as with the Kunming-Montreal Global Biodiversity Framework from 2022. The latter introduced a number of environmental targets, such as the pledge to protect and restore 30% of the world’s land and water by 2030, and is likely to trigger new national legislations enforcing biodiversity obligations on companies. 

“Today, we do not have a framework for biodiversity as we have for climate with the Paris-aligned Benchmarks (PABs) or Climate Transition Benchmarks (CTBs),” said Celeste. “We see biodiversity in the same trajectory as climate change in terms of momentum. When we think about climate change, between the Paris Agreement and the first PAB and CTB products, we had to wait for at least five years. I know there is a lot to do, but I hope momentum will be beneficial for biodiversity.”

The company is also a top three provider of decrement underlyings, according to SRP. Between 2019 and 2022, STOXX decrement underlyings were used across 19 national markets with sales exceeding USD 13 billion. In the last four years, STOXX’s thematic indices have been featured across 203 products, in total worth more than USD 3.3 billion. That gave the company a 36% market share in that segment.   

Armelle Loeb, Head of Index Sales for EMEA at STOXX, recently sat down with SRP for an interview in their Index Report 2023. The dialogue centered around indexing trends in the structured-products industry, and more. Below we republish the interview. 

What thematics are resonating with investors at the moment?

“Investors want to target the same themes and strategies that are capturing the imagination elsewhere, but to do so with the benefits of a structured note. That includes growth-oriented technological themes, as well as sustainability objectives. Both areas keep delivering exceptional innovation in terms of ideas and methodologies. Besides that, decrements also continue to see significant uptake as do volatility target indices. 

One example of those trends is the EURO iSTOXX^® 50 Future Healthcare Tilted NR Decrement 5% index, which combines a strong technology-related theme with a decrement. In fact, the index was the most popular underlying for structured products in 2022 in terms of assets under management. The index tracks the benchmark EURO STOXX 50^® plus the 10 largest securities from the STOXX^® Global Breakthrough Healthcare index, while assuming a constant, annual 5% performance deduction.

Two other thematic indices with strong inflows last year were the EURO iSTOXX^® 50 Artificial Intelligence Tilted NR Decrement 5% and the EURO iSTOXX^® 50 Sharing Economy Tilted NR Decrement 5%.

This year, if anything, has seen even stronger interest in these themes, particularly as the market has embraced the economic potential of AI. I expect new technological themes, such as the Metaverse and future mobility, to gain traction.”

What role do ESG considerations play as investors embrace these new thematic strategies?

“ESG is at the very center of every conversation with clients. The Sustainable Finance Disclosure Regulation (SFDR) has been a major driving force, and I don’t expect any slowdown there. Quite the opposite, actually. In the post-pandemic world, all clients want an ESG, climate or – most lately – biodiversity angle for their strategies. Either as a pure play or main objective, or in the form of exclusions attached to a strategy, for example a thematic one.

Biodiversity is emerging like a new paradigm, with new metrics being developed that can help investors measure their impact on ecosystems. We recently launched the ISS STOXX^® Biodiversity indices, which exclude companies involved in activities causing harm to biodiversity, select securities that have a positive impact on ecosystems and those enabling exposure to relevant UN Sustainable Development Goals (SDGs), and, finally reduce the portfolio’s carbon emissions. These steps can be used as a core strategy, but we are also discussing with some clients the integration of some of those filters as biodiversity exclusions within a broader strategy.

I should not forget to mention climate strategies, where we see a lot of interesting developments every month. That includes Paris-aligned benchmarks, clean energy and even indices tracking energy transition metals. In most of those cases, investors can now make use of measurements to tackle their goals that weren’t available only a few years ago. It is indeed very interesting times for everyone.”

Has the shift towards customisation opened the market to new players seeking to deliver tailored underlyings?

“What we have seen is the arrival of specialised data companies that provide new and smart datasets. As index provider, we welcome that. A lot of the new investment themes are difficult to build using traditional revenue-based data or sector classifications. For many of these emerging themes we need something else – for example, patents. With all these new datasets, you can detect trends more quickly with AI tools than you would be able to see via revenues. You can capture forward-looking growth.

At STOXX, we have a flexible, open-architecture approach that allows us to work with these data providers and be able to offer the right solutions in a more efficient and reactive way. They are bringing extreme innovation in data, so by partnering with them they can enhance the value of our methodologies.”

As the number of custom strategies increases, so does the complexity of some of the underlyings. Are there any suitability concerns around some of the thematic indices we see in the market?

“Complexity is a broad word. Some strategies are, by definition, complex, like a Paris-aligned benchmark that is required to comply with regulation. An optimization is also complex. We need to be clear on the definition of complex – and it is not an easy one. Innovation is at the core of the STOXX indexing business, and we specifically aim to bring ever-more sophisticated strategies to the market where we can combine our expertise with smart data or with tools such as Axioma’s portfolio construction capabilities. We have over two dozen thematic indices, for example, with customized versions derived from many of them. The selection process for many of them is no longer based on the more traditional metrics of industry or revenue, but on novel data such as patents, satellite images or companies’ annual reports.

Clients are now much more involved in the design of the indices than they were 20 years ago, and often it is them who lead in the adoption of innovative selection mechanisms. The level of sophistication that they have is very high.

That said, sophistication and customisation are welcome as long as they don’t undermine the transparency and rules-based objectivity of the strategy. Complexity should not and does not equate to higher risk. These days you can optimise your strategies and calibrate your desired risk level to the detail. Better technology empowers investors, and we should make the most of that. We spend as much time ensuring our strategies are clear, accurate and replicable as we do look for the best methodology tools. Not all indices will be suitable for all clients, and it is the duty of intermediaries to make sure that investors are well aware of where they put their money. That basic premise of retail investing still stands: investors must understand what’s under the hood of the products they buy.”

Where do you see the structured-products market in the next couple of years?

“I definitely see more innovation coming ahead, whether in themes or in methodologies. We have been through some very challenging times with the pandemic, the global slowdown, rising interest rates and the war in Ukraine. Throughout this time, all these challenges have provided fertile ground for issuers to come up with imaginative strategies – to the benefit of end clients. It is true that difficult macro environments can benefit the industry, but I don’t see why, at the same time, that growth should not continue in more market-friendly times!”

Recent market developments and investing trends have prompted investors to reconsider their investment allocations. Factors assist investors in understanding the present market and informing their investment decisions.

Melissa Brown, Managing Director of Applied Research, joins two experts to discuss factor investing in this video.

At a webinar hosted by Investment & Pensions Europe (IPE) on March 21 entitled ‘Navigating Europe’s equities and sustainable investing landscape,’ representatives from Qontigo and DWS discussed how multiple variables yield new options for investors and shape novel forms of constructing sustainable portfolios.    

Europe is at the forefront of the sustainable investing revolution because of investor demand, and regulators have caught up in recent years to establish rules that can advance green investments. The EU sustainable finance agenda comprises several legislative frameworks that interconnect: SFDR, Taxonomy, Benchmark regulation and MiFID II. Yet, lack of clarity in the regulation has often led to confusion, and investors would be better served by more clarity, Vera Cady, Director for Index Product Management at Qontigo, said at the webinar. 

“Even though the intentions of the regulators are moving us in a positive direction, current regulatory language is open to interpretation,” said Cady. “That can create ambiguity and confusion, and also a little bit of anger. Some investors don’t know how to navigate this current landscape.” Complying with regulations should become a more practical and pragmatic task with time, she added. 

In building indices at Qontigo, Cady explained, the determination of whether an investment is sustainable or not relies on two steps: 1) a screening process for minimum sustainability performance, including Good Governance and ‘Do No Significant Harm;’ and 2) a measurement of positive contribution, which can be achieved, for example, through aligning companies’ revenues contributions to the United Nations’ Sustainable Development Goals (SDGs). 

Exhibit 1 – Overview of Qontigo’s Sustainable Investment Framework

_{Source: Qontigo.}

To illustrate the challenge faced by investors in creating ambitious SFDR Article 9 funds, Cady told the audience that only 12% of companies in Qontigo’s global pool of stocks have at least 20% of revenues aligned with the SDGs. 

Qontigo offers a wide range of products to support investors in their sustainability journey. The suite of sustainable STOXX indices comprises ‘green’ versions of established benchmarks including the EURO STOXX 50^® and DAX^®. More recently, the firm introduced the modular STOXX^® World indices, which allow investors to flexibly build sustainable portfolios covering a broad and liquid universe of stocks spanning regions, countries, market capitalization and sectors.

Pragmatism, transparency, customization

Providing the asset manager’s perspective in the discussion was Sebastian Schiele, Head of Xtrackers Mandates Sales EMEA & APAC at DWS Group. Schiele said that the combination of growing regulation and objectives means portfolio construction must be pragmatic and transparent, and flexible enough to adjust to the client’s particular needs. 

“It’s about delivering investable benchmarks that are diversified, liquid but also representative of the broad objective,” said Schiele. That’s also where one has to distinguish between products created for a wider audience and the bespoke perspective, he added.

Melissa Brown, Managing Director for Applied Research at Qontigo, agreed that sustainability is deepening the need for tailored solutions. 

“Different investors will have different views on how they want to trade off being as close as possible to the broad market versus getting as much sustainability, however you want to define it,” said Brown. “And also, how do you want to get there? There is not one answer to that question. It varies by investor, and that’s why you need customization.”

Brown presented an analysis that showed the extent to which strategy customization affects portfolio returns and sustainability impact. In the study, the STOXX^® Europe 600 index was optimized to maximize exposure to various sustainability factors, across a spectrum of target levels of active risk. Unsurprisingly, the analysis confirmed that the further a portfolio deviates from an underlying benchmark, the higher the sustainability impact. 

Exhibit 2 shows how the portfolio’s ESG risk score, carbon risk, emissions intensity and SDG-aligned revenues improve the more active risk is allowed. The four metrics (for two, a higher value is better; for the other two, a lower value is better) improve further the more the portfolio breaks away from the market’s sector allocation (“industry bounds” = the lower the percentage, the more the portfolio mirrors the market’s industry allocation). 

Exhibit 2 – Higher Risk or looser industry constraints = better sustainability scores

_{Source: Qontigo. Benchmark is STOXX Europe 600, excluding companies that fail to pass activity screens. ESG Risk Score (Sustainalytics, a lower score is better), Carbon Risk Rating (ISS, a higher value is better), Emissions Intensity (ISS, lower is better), Percent of revenues meeting SDI goals (SDI-AOP, higher is better).}

The analysis offered two other findings. Firstly, certain strategies (e.g., minimize emissions) can achieve most of the improvement at a lower active risk. Secondly, targeting one sustainability objective often improves metrics in other goals, which allows investors to create more efficient portfolios by exploiting those correlations.

“It’s helpful to use an optimizer because you ensure a certain level of expected active risk and you maximize your exposure to the variable you are looking at,” said Brown. “You can tilt on one and still get others that come along for the ride. That’s good news as well.”

A limited tracking error is almost a universal demand of investors, but this may change over time, DWS’ Schiele said. 

“As investors become more comfortable with a particular topic, they will also, over time, allow for a higher tracking error budget” in their bespoke solutions, he said. 

More targeted themes

Rounding off, the panelists mentioned some of the big trends they see in sustainability investing. 

According to a CREATE-Research survey supported by DWS last September, pension funds are most interested in the topics of affordable and green energy, biodiversity, and reduced inequalities, strategies that reflect more thematic SDG- than ESG-type of investing. 

The DWS-CREATE poll also showed that ESG indices are already used on a broad basis, but that fund managers expect to use more Climate Transition and Paris-aligned benchmarks, as well as more thematic SDG-type investments.

“The focus is moving towards climate and thematic SDG investing,” said Schiele. “But that’s building on a good basis of investors deploying sustainability across the board using ESG benchmarks.”

Layering in

These days, Qontigo’s Cady said, on the institutional side, different sustainability themes — such as ESG, climate and SDGs — are being blended into one strategy. Some investors favor a “layered-in” approach to index building, she explained, where several indices can be created, each one adding sustainable objectives in an incremental manner. In this way, investors can measure how tracking budgets are used within each layer of the methodology and how each investment criterion impacts the final index.

With multiple options and varying objectives, selecting the right sustainability approach may feel like a formidable task for many investors in European equities. The panel at the IPE webinar offered several key points that might help investors as they start crafting such strategies.

According to Qontigo’s Axel Lomholt, thematic strategies have been underpinned by a major transformation in the investing landscape, which includes technological advancements, the growth of the ETF and online platforms, and a new cohort of young investors who are drawn to the economic and social implications of megatrends changing our modern world.  

“Technology over the past 20 years has completely transformed the way we can build portfolios,” said Lomholt, Chief Product Officer at Qontigo, general manager of STOXX and DAX indices. “And then you think about the way retail investors are buying financial products – that’s extremely different from 20 years ago.”

“You’ve got to make sure that you are capturing a theme” in the right way, he said. “That’s why it is important that you can work with someone like Eurex because you want to be sure that you have the capital markets that will support you.”

_{Eurex Derivatives Forum 2023}

Despite a negative market backdrop, 185 thematic ETFs were introduced in 2022 around the world, or 23% of total launches.¹ Passive thematic ETFs lured a net 39 billion euros over the twelve months, even as many of the growth-oriented products suffered a decline in prices.  

Eurex introduced futures on the STOXX^® Global Breakthrough Healthcare, STOXX^® Global Digitalisation and STOXX^® Global Digital Security indices last year. While trading volumes in the products are yet to take off, liquidity will eventually increase to support trading and hedging in the growing thematic ETF space, Randolf Roth, Executive Board Member at Eurex, said during the debate. 

“Thematics is the next step in a long journey,” said Roth. “It started with national indices, then the pan-European and global indices, and then sector indices. We managed to make most of them very liquid. ESG also came, and now thematics come as a sort of natural evolution of the ESG topic as well as of sectors.” 

“For the index provider, the ball is in the penalty area,” Roth said. “For us, as an exchange, it is in the mid-field right now, because we need to create liquidity. We have listed the products, we want to be at the front of development, but it will take a while.”

Those comments were echoed by Serkan Batir in another panel at the same event. Qontigo’s Global Head Index Product Development told the audience that it is often the case that the launch of ETFs leads to the listing of derivatives. While that trend started with benchmarks such as the EURO STOXX 50^®, Batir explained, a similar pattern is unfolding with more targeted strategies. 

What is happening on the thematics side mirrors the development of sector investing some years ago, said Batir. “It takes a bit of time on the education side, and thematics are seen as a riskier investment compared to sectors,” he said. “Demand is coming from the ecosystem of ETFs, market makers, product providers, and that helps drive liquidity and simplify trading of the product.”

Themes vs. sectors

The debate moved on to the advantages of investing on themes as opposed to traditional sectors. Thematic strategies cross the established boundaries of more conventional region-, country- or sector-based offerings. Sectors are often too broad to enable targeted investments: for example, an investor seeking specific exposure to chipmakers would be loaded up with multiple unwanted business segments if they bought a technology sector ETF. 

“There are new activities that cannot be captured in a sector classification,” Norbert van Veldhuizen, Head of Equity Index Product EMEA at FTSE, told the Forum’s audience. “We need to have more agile systems to identify those companies and their activities. Whether it is revenues or investments in R&D, you need more flexibility, more agile classification systems.” 

The AI data machine

The speakers also touched upon the role of artificial intelligence in designing and building new indices. 

“AI helps us get the information out of the data, whether it is more objective or subjective in nature,” said FTSE’s Van Veldhuizen. “Over the next few years there will be tons of data available, generated not by humans but by AI. That’s shaping the industry, and it’s important for index providers to have more flexibility to build thematic indices.” 

“The key point is subjective analysis,” added Qontigo’s Lomholt. “We all have lots of systems that can analyze data. I think what we are moving into is, how do you analyze text? How do you analyze patents? This is where AI comes in.”

Unfolding themes

The use of patents’ information is one example of technological innovation that has led to new thematic indices in recent months. At the panel, there was agreement on which themes are likely to continue garnering the most interest. The speakers mentioned technology-related topics including cybersecurity, and themes around climate change and the environment. 

“Especially for the younger generations, a megatrend like climate change is something that can be experienced today,” said Van Veldhuizen. “That’s where we as index providers have the responsibility to evolve and innovate, and to come up with new solutions, to build newer and better products for investors.”

The topic of thematics will continue to dominate the conversation in the ETF industry, as the pace of innovation and emerging investable themes shows no sign of abating. In this sense, the thematic indices panel at the Eurex Derivatives Forum provided an insightful glance at the work of leading index providers.

¹ According to Qontigo data.