Why The New S&P 500 Bond Index Matters

The latest S&P Dow Jones bond index does something no other major bond index has done before: It prices bonds intraday much like equity indexes have done for years.

Intraday pricing in fixed income is no small innovation. We’re talking about over-the-counter bonds where there aren’t live markets being maintained by market makers for each individual security, as in the equities markets.

J.R. Rieger, head of fixed income indices at S&P Dow Jones Indices, told us that providing intraday pricing is a “challenge,” and that it’s now being achieved through reliance on two-sided market data that gauges changes throughout the day on these bonds.

The index should allow investors to monitor—side-by-side, minute-by-minute—the price action of stocks and bonds for the first time. Think of it as bond investing that’s more equitylike.

At some point, the S&P 500 Bond Index will become the benchmark to one or more funds—talks are already ongoing with issuers, S&P Dow Jones Indices tells us—but for now, we caught up Rieger to talk about why this innovation is important and what it means for the future.

Here’s our takeaway:

• The S&P 500 Bond Index is different from other corporate bond indexes, such as the one tracked by the $21 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD | A-77).

Yes, bond ETFs are priced every 15 seconds—they are traded throughout the day—but most fixed-income indexes are priced at end of day. ETFs have intraday net asset value calculation requirements, but indexes don’t.

• The S&P 500 Bond index is market-value-weighted, so the debt of the most-indebted firms make up the largest pieces of the portfolio. But this is only “version 1.0” of the index.

S&P Dow Jones wants to offer other weighting methodologies down the road, but the decision to start off with this approach is simply because that’s the most commonly used weighting scheme in bond indexes today, Rieger says. In short, it makes it more relatable to the investing community.

• The timing of the launch reflects a corporate bond market that’s growing in importance.

The size of the corporate bond market has grown dramatically over the last few years as corporations have taken advantage of the low-rate environment, Rieger says. Today the corporate bond market is an important component of investor portfolios—it’s too big to be ignored.

• S&P 500 companies have bought back billions of dollars of their own stock, and while that may help stockholders, it doesn’t bondholders. But that doesn’t mean owning these bonds is a bad idea.

The value propositions of fixed income still ring true even in an environment where companies are buying back their stock, often with borrowed money. Bonds are somewhat predictable; they are lower volatility than equities; they show, historically, low correlation to equity markets; they offer a steady stream of income.

“The allure of corporate bonds to investors has been heavily driven by the nominal returns of the U.S. Treasury bond market,” Rieger said. “As investors have sought yield in other asset classes, that has helped compress yields by putting a lot of demand force behind corporate bonds.”

That strong demand is still alive and well, he says, and prospects of an equity bubble should continue to push investors to look for alternatives, and for the characteristics of the bond market—be it Treasurys or investment-grade corporates. This index is certainly timely.

• The S&P 500 Bond Index does not carry debt from all companies in the S&P 500. It tracks the debt of 430 companies reflecting more than $3 trillion in debt outstanding and $3.8 trillion in market value.

There are some companies in the S&P 500 that don’t have debt that qualifies for this index. S&P Dow Jones set out to find a “homogenous” set of bonds, so the debt had to meet certain criteria. For example, it had to fixed-rate bonds only. It had to have a certain level of par outstanding. Over time, as companies borrow in the bond market, and the debt qualifies, they’ll be added to the index.