Solactive – scope for disruption

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

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

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

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

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

That, according to Pfeiffer, is coming back - principal protected structures linked to traditional market cap indices have significantly picked up driven by the rise in interest rates.

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

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

Liquidity issues

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

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

Solactive industry sector indices - sales and issuance 2021-2022

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

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

Top sectors

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

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

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

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

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

Fuelling new themes

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

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

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

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

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

Utilities and oil & gas are still the broader sectors, and indices structuredretailproducts.com provide the easiest and most common way to measure the performance of certain segments, particularly the technology angle and anything ESG related, such as biodiversity.

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

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

Innovation

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

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

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

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

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

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