Index provider - Standard & Poor's

The index market today is a far cry from the time when providers merely calculated traditional equity benchmarks that investors used to gauge market sentiment. Whoever comes up with the best idea and can encapsulate it neatly in a transparent and liquid index usually wins hands down. This year it has been Standard and Poor's innovative ideas and indexation that have captured the attention of both structured products and ETF issuers and investors. "S&P has done a superb job with its thematic index series. This, coupled with the fact that it has an extremely strong brand, makes it very attractive to investors," says one US structured products issuer.

The breadth and diversity of S&P's offerings spans all asset classes, from listed private equity to currency arbitrage to frontier markets. The most innovative offerings to come to market this year comprise the S&P 500 130/30 Strategy Index, the first such offering from an index provider; the S&P Global Thematic Index Family, a series of indexes which provide exposure to investment themes that cut across traditional industry definitions and boundaries; and the S&P Arbitrage Index Family, which has been able to offer reduced correlation to traditional assets.

"Issuers and investors are searching for less-correlated alpha," says Srikant Dash, head of global research and design at S&P Index Services in New York. "Ultimately, this search translates into demand for product creation on new ideas such as themes, strategies and new markets. However, competition has increased. It is not just the index providers that challenge, it is anyone with an idea and the means to translate the idea into an index."

The innovative S&P 500 130/30 Strategy Index is designed to measure the performance of an investment strategy that establishes 30% overweight and underweight positions relative to the S&P 500. The index is rebalanced on a quarterly basis and comprises a core 100% long position in the S&P 500, 1% overweight positions in 30 S&P 500 constituent stocks (long basket), and 1% underweight positions in 30 S&P 500 constituent stocks (short basket).

The index employs a rules-driven framework that leverages qualitative and quantitative factors to arrive at the long and short baskets. Constituents of the overweight basket have their weights increased by 1% relative to the S&P 500, while stocks in the underweight basket each have their weights decreased by 1%. However, since most stocks in the S&P 500 have less than 1% weight, underweight positions typically result in short exposures.

"The concept of short extension is fairly new and there are only about 20 institutional fund managers offering this strategy, but it hadn't percolated down to retail level," says Dash. "We recognised that this concept was gaining a lot of traction, and developed the index. The problem with 130/30 is that you first have to have a model that identifies the long and short stocks, and you then have to make the model work in a transparent rules-based framework."

The most talked about and successful of S&P's innovations has been the Global Thematic Index Series, which has managed to capture over $2 billion in assets since its launch in February 2007. The growing suite of S&P thematic indexes comprises the Emerging Markets Infrastructure, Global Clean Energy, Global Nuclear Energy, Global Alternative Energy, S&P Global Eco, Global Infrastructure, Global Timber & Forestry, and Global Water and the S&P/BusinessWeek Global Innovation Index.

Indexes in the series have served as the underlying for many structured products and ETFs, including the Claymore S&P Global Water ETF and the iShares S&P Global Infrastructure, Clean Energy, Timber and Forestry and Water Index Funds. In the alternative index space, Lehman Brothers launched an ETN on the S&P Listed Private Equity index. "It has been one of the most successful index series in recent times," says Dash. "Because S&P is a provider of financial databases and information, we were able to leverage off these platforms to create qualitative information that we used to identify companies within each theme."

S&P also launched the Arbitrage Index Family, which comprises the S&P 500 Volatility Arbitrage, Currency Arbitrage and Long-Only Merger Arbitrage. The volatility index is intended to replicate a strategy that seeks to take advantage of the difference between implied volatility and realised volatility, while the currency index is based on a carry-trade strategy linked to G10 currencies.

"The arbitrage indexes provide less-correlated alpha, which is want investors are searching for," says Dash.