The Liquidity Landscape: Trading Linked to S&P DJI Indices

From short-term traders to long-term passive investors, a healthy trading ecosystem benefits market participants by promoting price transparency, market efficiency and confidence. Updating our analysis from 2019, this paper conducts a survey of the observed volumes and implied holding periods for a global and cross-asset range of listed products tied to indices produced by S&P Dow Jones Indices (S&P DJI). The results offer perspective on the use of indices as the basis for active and passive investment strategies.

• Reported volumes across a range of products tied to S&P DJI’s indices evidence highly active usage of index-linked products.
• A globalised network of trading is associated with the S&P 500® and related indices, with potential liquidity network effects.
• We emphasise the impact and relevance of trading in S&P 500- linked products across time zones and also spotlight Australia’s growing S&P/ASX 200 ecosystem.

Exhibit 1: S&P DJI Volumes Exceeded the Value of Assets

Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2023. Please refer to later sections in original paper. Chart is provided for illustrative purposes.

The Value of Volumes

Index funds, which hardly existed 50 years ago, now play a prominent role in global financial markets, and the growth in aggregate assets under management in “passive” or index-tracking funds and portfolios may be one of the most important developments of modern financial history.¹ As of the end of 2023, approximately USD 13 trillion of assets were in products or portfolios tracking indices provided by S&P DJI.² However, while estimates of the value of assets tracking (or benchmarked to) indices are prevalent in the media,³ comprehensive estimates of secondary market volumes in passive vehicles can be more obscure.

This is unfortunate, because volumes can tell us how active some of the users of passive investment vehicles truly are. As well as indicating the presence of higher-frequency market participants, volume data can give us an indication of how well a market is “policed” by arbitrageurs. Long-term passive investors may benefit from the presence of more active traders. For example, consider a hypothetical investor who purchased an exchange-traded fund (ETF) tracking the S&P 500 10 years ago expecting to earn a return that would be representative of the overall U.S. stock market and simultaneously closely comparable to the performance of an index that is reported widely in the media. Such confidence depends on two factors:

• At the time of entering or exiting their position, the investor relies on the existence of arbitrageurs who constantly monitor the relationship between the value of the ETF and the value of the fund’s holdings, with the intention to purchase or sell both simultaneously to exploit (and thereby diminish) any misalignments. If the ETF portfolio closely matches the composition of an index, and that index is associated with related liquid instruments, then this arbitrage is easier to implement. Thus, for example, liquid futures tracking the S&P 500 can help ETFs tracking the S&P 500 trade closer to their fair value.
• In between entry and exit, the investor hopes to depend on the fact that the S&P 500 and popular products based on that index receive a great deal of scrutiny from the press and the investment community. Every change in the underlying index, including adds, drops and changes to the methodology, is subject to close inspection from market participants around the globe, as are the portfolio compositions of popular ETFs tracking the same index. Such scrutiny acts to both police the ongoing link between the underlying index and its stated objective, and the link between the ETF and the index it aims to track.

The investor in this hypothetical example effectively relied on a large and liquid trading ecosystem tied to the same index, including arbitrageurs who systematically minimise mispricings, as well as other market participants and commentators whose actions act to increase transparency and discipline in both index and product design. Higher volumes in any single product are part of this story, but a comprehensive perspective requires an assessment of volumes across an entire network (if one exists) of related instruments tied to the same or similar indices.

The Rise of Trading in Index-Based Products

One of the consequences of the growth of indexing has been the widespread availability of ETFs, with almost 10,000 offerings globally as of April 2024.⁴ Index-based products are increasingly prevalent among the most-traded securities, as evidenced by Exhibit 2, which shows the proportion they represent among the top 50 most-traded U.S.-listed equity securities. In 2023, ETFs represented over 40% (21 of the top 50) of the most-traded U.S.-listed equity securities by U.S. dollar volumes, quintupling from 8% in 2003.

Exhibit 2: Index-Based Products Are Increasingly among the Most-Traded Securities

Source: S&P Dow Jones Indices LLC, Bloomberg. Data as of Dec. 31, 2023. Chart is provided for illustrative purposes.

Index trading has grown beyond “vanilla” ETFs into offerings such as leveraged and inverse ETFs, and it also encompasses other instruments such as index futures, index options and options on exchange-traded products (ETPs).⁵

Conclusion

The S&P DJI ecosystem is notable for its liquidity globally. The volume of trading is significant in comparison to the associated assets, exemplified by USD 224 trillion in volumes associated with S&P 500 products, in comparison to approximately USD 10 trillion in products or portfolios tracking the same benchmark at the end of 2023.⁶ Albeit with less material absolute magnitudes, there are similar trends across a range of other indices that span asset classes and regions, including the equity indices from the S&P/ASX Series and the iBoxx suite of investment grade and high yield bond indices. This invites several important inferences:

• Most obviously, the volumes reported herein offer a general and emphatic confirmation that “passive” products may have some highly active users.
• There are potential benefits even for market participants who trade infrequently, including scrutiny of their holdings and benchmarks, as well as greater confidence in the prices they ultimately observe or experience.
• Our results also illustrate how different products tied to different indices related by index methodology and construction can form nodes of a connected network of pricing and trading activity.

A robust trading ecosystem may not only offer benefits for traditional buy-and-hold passive investors, but also for active investors—most obviously those employing a top-down approach to portfolio construction and using index-based tools to implement their allocations. A range of futures, options, ETPs and options on ETPs, representing whole markets or more granular segments, such as sectors, factors and much more, are now available to market participants across regions as tools for such portfolio construction activities. As a result, index-based products are a growing presence within the world’s most-traded securities and derivatives.

The writer would like to acknowledge Anu R. Ganti, Sue Lee and Igor Zilberman as co-authors of this piece.

---

_{[1] Ganti, Anu and Lazzara, Craig, “Shooting the Messenger,” S&P Dow Jones Indices, Nov. 2022.}

_{[2] “S&P Dow Jones Indices Annual Survey of Assets,” S&P Dow Jones Indices, 2023. Notably, roughly half of the USD 13 trillion of assets mentioned were associated with products with an exchange listing, as shown in Exhibit 1.}

_{[3] Schmitt, Will, “Passive eclipses active in US fund market as assets swell to $13.3tn,” Financial Times, Jan. 2024.}

_{[4] “ETF Impact Report 2024-2025,” State Street Global Advisors, April 2024.}

_{[5] The term “ETP” is commonly used to group together ETFs with other economically similar but legally distinct structures, including exchange-traded trusts and exchange-traded notes.}

_{[6] Source for assets: “S&P Dow Jones Indices Annual Survey of Assets,” S&P Dow Jones Indices, 2023.}