IN THIS LIST

Practice Essentials - Low Volatility Indexing in Canada

Elevating the Aristocrats

Rethinking the U.S. Investment-Grade Corporate Bond Market

Talking Points: A New Way to Look at Corporate Bonds

Looking Beyond Traditional Benchmarks to Add Value in Emerging Markets

Practice Essentials - Low Volatility Indexing in Canada

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Fei Mei Chan

Director, Core Product Management

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Craig Lazzara

Managing Director, Core Product Management

THE LOW VOLATILITY ANOMALY

Although the low volatility anomaly was first documented more than 40 years ago,[1] the fearful and volatile market environment of the years following the 2008 financial crisis propelled the concept to the forefront of market participant interest.  In recent years, low volatility has been a hot topic in investment discourse, and this has resulted in innovative financial instruments that exploit the anomaly.  Importantly, the low volatility anomaly is not limited to one or two markets, but rather it seems to be universal.[2]

The S&P 500® Low Volatility Index is a passive vehicle that seeks to exploit this phenomenon systematically.[1]  Since 1991, the index has outperformed the S&P 500, and it has done so at a substantially lower level of volatility (see Exhibit 1).  In Canada, the performance differential between the country’s benchmark index and its low volatility counterpart is even more pronounced (see Exhibit 2).

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Elevating the Aristocrats

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Jason Giordano

Director of Fixed Income

Pairing the S&P 500® Dividend Aristocrats® With the S&P 500/MarketAxess Investment Grade Corporate Bond Index

Both the S&P 500 Dividend Aristocrats and the S&P 500/MarketAxess Investment Grade Corporate Bond Index were designed to measure the performance of blue-chip, high-quality companies of the S&P 500.  They both focus on well-capitalized U.S. companies with strong credit fundamentals and proven capital management.  Taken together, they offer an opportunity for steady income, protection against market volatility, and enhanced liquidity.

  • The S&P 500 Dividend Aristocrats is designed to measure the performance of S&P 500 constituents that have increased dividends every year for at least 25 years.
  • The S&P 500/MarketAxess Investment Grade Corporate Bond Index tracks the largest-issued, high-quality bonds of S&P 500 constituents. The index offers efficient exposure to the broader U.S. investment-grade corporate bond market, while also including bonds that tend to trade in larger volume and with higher frequency, thus offering greater depth of liquidity. 
  • Combining the complementary attributes of the S&P 500/MarketAxess Investment Grade Bond Index and the S&P 500 Dividend Aristocrats can potentially result in increased yield, reduced volatility, and higher risk-adjusted returns.

Constituents of the S&P 500 Dividend Aristocrats or the S&P 500/MarketAxess Investment Grade Corporate Bond Index are limited to just 200 of the S&P 500 companies, but there are only 26 companies that reside in both.  These include the household names such as AT&T, CocaCola, Exxon Mobil, Johnson & Johnson, McDonald’s, Procter & Gamble, and Walmart. 

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Rethinking the U.S. Investment-Grade Corporate Bond Market

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Jason Giordano

Director of Fixed Income

Designed to track the largest and most frequently traded high-quality bonds issued by the well-known companies in the iconic S&P 500®, the S&P500/MarketAxess Investment Grade Corporate Bond Index provides a new way to look at the U.S. investment-grade corporate bond market.


EXECUTIVE SUMMARY
  • The S&P 500/MarketAxess Investment Grade Corporate Bond Index consists of high-quality issuers from the S&P 500; companies with global revenue streams, strong balance sheets, and a demonstrated capacity to service debt payments.
  • It seeks to track the largest-issued bonds by size—these issues tend to trade in larger volume and with higher frequency, hence offering greater depth of liquidity.
  • The index offers a more efficient way to view the broader U.S. investment-grade corporate bond market by tracking fewer bonds while achieving similar or better performance than the benchmark.

    EXPANSION OF U.S. CORPORATE CREDIT

    The accommodative conditions created by low interest rates and strong investor demand have resulted in an explosive expansion of corporate credit since the financial crisis. Over the 10-year period beginning Dec. 31,2007, the amount of U.S. corporate debt outstanding increased by over USD 4 trillion.[1]  U.S. companies have tapped the bond markets for a number of purposes: efficient capital management (e.g., refinancings, share buybacks, dividends, etc.), increased capital expenditure (R&D, fixed assets, etc.), and to fund merger and acquisition activity.  S&P 500 companies have been at the forefront of this expansion and were responsible for approximately 70% of the increase in outstanding corporate debt over the period studied (see Exhibit 3).

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Talking Points: A New Way to Look at Corporate Bonds

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Jason Giordano

Director of Fixed Income

The S&P 500/MarketAxess Investment Grade Corporate Bond Index seeks to measure the performance of the largest, most frequently traded bonds issued by high-quality companies in the S&P 500.

1. How does this index compare to broader U.S. investment-grade corporate bond indices?

The S&P 500/MarketAxess Investment Grade Corporate Bond Index captures similar characteristics of the broader U.S. investment-grade market, such as total return, yield, and duration. However, by focusing on the largest, most frequently traded bonds of well-known companies in the S&P 500, the index provides improved relative liquidity versus issues in the broader corporate bond market.

2. How is the S&P 500/MarketAxess Investment Grade Corporate Bond Index constructed?

The S&P 500/MarketAxess Investment Grade Corporate Bond Index is a subindex of the larger S&P 500 Investment Grade Corporate Bond Index. The index was created in an effort to identify the largest, most frequently traded, high-quality bonds issued by members of the S&P 500. The first step in designing the index was to isolate only high-quality issuers.

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Looking Beyond Traditional Benchmarks to Add Value in Emerging Markets

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Michael Orzano

Senior Director, Global Equity Indices

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John Welling

Director, Global Equity Indices

INTRODUCTION

As emerging markets have grown in size and importance, emerging market equities have become a core part of many portfolio allocations. In addition, the increased diversity and liquidity of emerging equity markets have made strategies commonly used to manage developed market portfolios (such as tactical allocations across regions and size segments) much more accessible to emerging market investors.

Despite these trends, the use of more complex asset allocation strategies within emerging market equities remains quite limited, as the vast majority of market participants continue to gain exposure to this asset class either via index-linked products that track traditional benchmarks or through active managers with mandates closely tied to those benchmarks. While accessing emerging markets through a single holding linked to a conventional benchmark can be an effective, low-cost way to obtain unbiased exposure to this asset class, evidence indicates that using a more discerning approach to managing emerging market portfolios may potentially add value in the same ways it can in the U.S. and other developed markets.

ALL EMERGING MARKET BENCHMARKS ARE NOT CREATED EQUAL

While most broad emerging market benchmarks tend to be highly correlated, there are methodological differences that can result in substantive performance differentials over time.  Therefore, it is important to understand how emerging market benchmarks are constructed.  For example, in the trailing 15-year period ending Feb. 28, 2018, the S&P Emerging BMI gained 580% on a cumulative total return basis, while the MSCI Emerging Markets Index gained a comparatively smaller 540% for the same time period.  Analysis shows that the difference in performance was driven by two main factors.  First, the MSCI Emerging Markets Index has an approximate weight of 15% in South Korea, while South Korea has been ineligible for the S&P Emerging BMI since 2001, when it was reclassified as a developed market. South Korea has underperformed 11 of the 16 countries that have been classified as emerging markets by S&P Dow Jones Indices over the 15-year period studied.  Second, the S&P Emerging BMI has significantly broader coverage, including large-, mid-, and small-cap stocks, while the MSCI Emerging Markets Index includes only large- and mid-cap stocks.  Over this period, the S&P Emerging SmallCap outperformed the S&P Emerging LargeMidCap by more than 146%. 

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