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Blog Posts — November 13, 2023

The role of indices in a fast-changing world 

On Nov. 9, STOXX, part of Deutsche Börse Group, celebrated in London with clients and partners the occasion of its 25th anniversary.

This was a good opportunity for us to speak with Stephan Leithner, member of the Executive Board and responsible for Pre- & Post-Trading businesses at Deutsche Börse Group, and with Axel Lomholt, General Manager at STOXX.

We got the two executives’ impressions on the growth trajectory of the index business in the last 25 years and the role of indices in changing financial markets. We also asked them what lies ahead for an indexing industry immersed in full transformation.

Stephan Leithner and Axel Lomholt

Stephan: “We are very proud of the long tradition at STOXX. For Deutsche Börse’s indexing business, the next phase started with the recent merger between ISS and STOXX. The newly combined ISS STOXX is being brought in with SimCorp, the leading front-to-back investment process technology provider, under a unique Investment Management Solutions segment at Deutsche Börse. The combination of ISS’s quality ESG data and research and STOXX’s indexing expertise will enable us to provide clients with a comprehensive offering addressing key investment themes.

Speaking of ESG data, sustainability is a key megatrend that will continue to fundamentally change the investment business over the coming years. The market landscape is also moving towards more regulation, which in turn leads to increased securitization, enhanced transparency and standardization. Even though the geopolitical environment has become more complex, we think that markets will get even more globalized. Indices are key to that transition. Investors want transparent, liquid and cost-efficient alternatives for investments, and risk management continues to be front-of-mind.” 

Axel: “The indexing space has been transformed radically in the last 25 years, and the acceleration in change witnessed most recently is an indication of what’s to come. 

On the one hand, the growth of sustainability, thematic and factor-based strategies is likely to extend beyond what we’ve seen so far. And that is where we have invested a lot of our time and effort, with no detriment to the benchmarks segment, which continues to be a mainstay in investment markets.

On the other hand, we believe that technology will keep driving innovation. For index providers, this means more sophisticated data inputs and advanced index design techniques. While equity prices were the main data required for index construction years ago, other sources are now common, including companies’ revenues, patents, factor signals and sustainability scores. With our in-house and partner research teams, we have taken those inputs to come up with novel products. At the same time, the ever-larger potential of artificial intelligence is pushing the boundaries of intelligent index construction. Yet, despite these breathtaking advances, our guiding principles at STOXX remain unchanged: to provide rules-based, transparent, representative and investable indices.”

Stephan: “And this, in the light of increasing regulation, is more important than ever. STOXX is best known for its EURO STOXX 50 and DAX benchmarks, which are truly iconic in financial markets. The EURO STOXX 50 is the heartbeat of the Eurozone’s equity markets, and lies at the center of a comprehensive tradability ecosystem, whose ETFs, futures, options and structured products are among the world’s most popular. But the conversation on indices has moved to more innovative themes and methodologies, and I’m thrilled that the STOXX brand is associated with them.” 

Axel: “I’ll mention some of those solutions. This year we launched the ISS STOXX® Biodiversity indices, which showcase the complementary work we can accomplish with ISS. The multi-modal set tackles nature-related risks and opportunities through a comprehensive approach that excludes companies that negatively impact biodiversity, and provides exposure to companies aiding our natural capital.

In 2019, Europe’s first sustainability-focused derivatives were listed with futures on the STOXX® Europe 600 ESG-X. Together with our partners at Eurex and some of the world’s most forward-thinking clients, we introduced those contracts with the conviction that flows will move from traditional market cap-weighted indices to sustainable strategies. Today, with over 1 million contracts traded so far in 2023, that belief stands as strong as ever.

And we have been busy in our benchmarks segment as well. In 2022 we launched the STOXX World Indices, a suite that allows investors to slice and dice the world’s equity markets in a modular way, with a consistent methodology and international standards.

With that index framework we designed the iSTOXX® World Min Vol ESG index for a large UK manager. At the center of this sustainable, factor-based index solution is an optimized systematic process that balances multiple investment objectives and considerations.

And we remain in execution mode with a myriad of super exciting projects on the horizon. I could go on, but I would take your entire evening.”

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Stephan: “Most of those solutions were born out of a client need and of close cooperation. And our clients’ goals and requirements are changing too. As their strategies evolve, I see the index business as a facilitator as well as a risk manager to help them accomplish those goals. STOXX helps them deliver better and smart outcomes, and enable them to optimize their returns as well as their impact.” 

Axel: “One the major forces for change over the past few years is that clients want to co-develop indices and, as a result, customization has become our ‘secret sauce’. We hear from these clients that they highly value the accuracy and reliability of our indices, and the flexibility with which we tackle each project allowing them to tailor solutions for their investors. We want to continue being known for that.”

Stephan: “On the product side, there will be a massive transfer of wealth to a younger, tech-savvy and sustainability-conscious generation. Beyond the broader active-to-passive trend, there are specific drivers of growth for our index business. These include strong thematic-investing trends, a vibrant structured-products market, and sustainability disclosure regulation. Beyond the ESG space already discussed, there are additional growth drivers in segments including fixed income, alternative assets, private markets and digital assets. It truly is a multi-faceted growth story.”

Axel: “Without a doubt, ETFs have been the standout protagonists in the modernization of markets in recent years, and I suspect that that role will stay. But newer products such as total return futures, active ETFs, daily options, etc., will add to the impulse. STOXX is leader in some segments and geographies, and a challenger in others. That requires us to stay competitive, anticipate changes, and make informed decisions.”

Stephan: “The indexing boom has blurred the lines between active and passive investing, and investors can now access the most differentiated strategies through systematic, index-based approaches. This has brought incredible benefits for investors, and STOXX can be proud to have been part of that transformation.” 

Axel: “If the recent evolution has taught us one thing is that time spent on the active-vs.-passive debate is no longer time well spent. Instead, clients have moved on and now want to discuss what the right alternative is in terms of building a holistic, broader strategy, spanning across several asset classes and both active and passive approaches.”

Stephan: “The index industry has shown robust development and financial performance through the ups and downs of the pandemic and the shift in the interest-rate cycle. Further back, we have had a front-row seat in the fantastic transformation of financial markets of the last 25 years. I, personally, couldn’t be more excited about what lies ahead.”