IN THIS LIST

Seeking Volatility Protection Using Indices

Blending Factors in Smart Beta Portfolios

Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

Value: A Practitioner's Guide

TalkingPoints: Introducing the S&P/ASX Small Ordinaries Select Index

Seeking Volatility Protection Using Indices

Contributor Image
Rupert Watts

Head of Factors and Dividends, Product Management

S&P Dow Jones Indices

  • Fluctuating periods of “risk-on” and “risk-off” mean that spikes in equity market volatility and large drawdowns are increasingly common in today’s economy.
  • Passive investment strategies could help position portfolios to withstand market volatility.
  • S&P Dow Jones Indices (S&P DJI) offers a variety of indices specifically designed to help smooth out equity market drawdowns and improve risk-adjusted returns.
  • These indices can be broadly placed into three categories: defensive equity, multi-asset, and volatility.

1. INTRODUCTION

With markets fluctuating between “risk-on” and “risk-off” environments, shifts in economic conditions can pose significant challenges for investors.  Exhibit 1 shows events throughout the current market cycle causing dramatic spikes in volatility and large drawdowns.  With more of these likely in the future, as our long bull market cycle ages, how do investors best position portfolios to respond?

Many investors are familiar with the indices that exist to gain broad market exposure in a low-cost, liquid, and transparent manner.  But which passive strategies can outperform during periods of negative equity performance and increased volatility?

S&P DJI offers many indices designed to help take the sting out of equity market drawdowns and improve risk-adjusted return.  In this paper, we examine such flagship indices and their performance during large equity market drawdowns, notably Q4 2018.

For the purposes of this paper, the indices have been divided into three broad categories (defensive equity, multi-asset, and volatility) to highlight shared characteristics, key features, and risk considerations.  For ease of comparison, Exhibits 2, 3, and 4 provide an overview of these categories and the corresponding indices.

pdf-icon PD F Download Full Article

Blending Factors in Smart Beta Portfolios

In recent years, smart beta strategies have seen a significant increase in popularity.  These systematic strategies seek to measure factors in order to harvest the associated long-term risk premium.  Many empirical studies show that smart beta strategies have historically outperformed their capweighted benchmarks.  However, different single factors tend to outperform in different market environments.1  Therefore, holding a combination of factor strategies in a blended portfolio could provide a powerful source of diversification and more stable excess returns.

This paper briefly reviews the definition and performance characteristics of the S&P 500® Single-Factor Indices, demonstrates their historical cyclicality and correlation, and presents a few examples of how market participants could potentially use investment vehicles tracking these single-factor indices as part of their own factor allocation, either as strategic or tactical plays.  These examples expand the traditional asset allocation frameworks to factors, including optimal allocation frameworks, heuristic allocation frameworks, and a trend-based timing framework.

1. SINGLE FACTORS

The S&P Single-Factor Indices comprise four key factors: low volatility, momentum, value, and quality.  A rules-based selection and non-marketcap-weighting approach is used to construct the indices, and diversification and investability are taken into consideration.

The indices are constructed from the universe of S&P Dow Jones Indices’ (S&P DJI) headline global indices, including the S&P 500, S&P Europe 350®, S&P Global BMI, and regional and country benchmarks.  Approximately one-fifth of the universe is selected by applying liquidity criteria.  The constituents are then weighted two ways: by the inverse of volatility in the case of low volatility indices, and by the product of factor score and market cap for the momentum, value, and quality factors.  The indices are rebalanced semiannually except for the low volatility indices, some of which are rebalanced quarterly.  Exhibit 1a provides an overview of the S&P Single-Factor Indices.

In this paper, we will focus on the S&P 500 Single-Factor Indices.  Exhibit 1b provides the description of the four long-only, single-factor indices, together with a dividend index and an equal-weight index, built on the S&P 500 universe.

pdf-icon PD F Download Full Article

Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

Contributor Image
Andrew Innes

Head of Global Research & Design

S&P Dow Jones Indices

INTRODUCTION

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change.  Carbon prices are already implemented in 40 countries and 20 cities and regions.  Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.[1]

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

The key points included in the index concept are as follows: 

  • Carbon pricing risk from a growing array of new policies and taxes leading to potentially significant increased costs for companies.
  • Every company having a different carbon emissions profile—its total greenhouse gas (GHG) emissions footprint and where geographically these emissions occur.
  • Carbon pricing risk could vary substantially among companies operating in the same business sector.

This development is an example of the broader move toward incorporating environmental, social, and governance (ESG) considerations in asset management.

pdf-icon PD F Download Full Article

Value: A Practitioner's Guide

WHAT IS VALUE?

The foundational lessons of Graham and Dodd provide a recipe for market participants to look at stocks based on a valuation framework and to understand the relative cheapness of stocks. This framework has been used throughout the years, and many have adapted or adjusted it to meet their investment styles or views.

At the most basic level, the goal of investing in value stocks is to buy stocks that are trading at a discount relative to their peers (based on company financials) but have upside potential. How someone measures the relative “cheapness” and determines how much of a portfolio to put in a “cheap” stock are key items to consider when looking at value.

Using company financial metrics, the S&P Enhanced Value Indices seek to measure stocks with attractive valuations based on three key fundamentals.

  1. Price-to-Earnings Ratio: Calculated as a company’s trailing 12-month earnings per share divided by its share price. A key metric used for company valuation, we use this ratio to identify companies with earnings that may not be reflected in their share price when compared with other companies.

  2. Price-to-Book Value Ratio: Calculated as a company’s latest book value per share divided by its share price. This metric is key in understanding what proportion of a company’s assets are priced into the shares of a company.

  3. Price-to-Sales Ratio: Calculated as a company’s trailing 12-month sales per share divided by its share price. This metric is used to identify companies that might not have consistent earnings but still maintain robust sales growth relative to their share price appreciation. These three ratios were selected to identify the stocks that could have the most potential upside value relative to their share price. For each stock in the underlying index and for each metric, a risk-adjusted z-score is calculated and a simple average of these three z-scores is taken.

These three ratios were selected to identify the stocks thatcould have the most potential upside value relative to their share price. For each stock in the underlying index and for each metric, a risk-adjusted z-score is calculated and a simple average ofthese three z-scores is taken.

pdf-icon PD F Download Full Article

TalkingPoints: Introducing the S&P/ASX Small Ordinaries Select Index

Contributor Image
Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Could incorporating earnings quality and liquidity improve risk/return in Australian small-cap equities?

  1. Why is the S&P/ASX Small Ordinaries Select being introduced now?

Prior research has demonstrated that profitability matters for small-cap companies in the U.S.1 For example, the S&P SmallCap 600®—which includes earnings eligibility criteria—has outperformed the broader Russell 2000 Index (with lower volatility) for more than 20 years. Our new S&P/ASX Small Ordinaries Select Index extends this phenomenon to Australian equity markets where we have found that a similar effect exists. Simply put, small-cap companies without a track record of generating earnings have performed poorly relative to their profitable peers and have thus been a drag on broad small-cap indices.

How does the S&P/ASX Small Ordinaries Select Index work?

The index is a part of the S&P Global SmallCap Select Index Series. In order to be eligible for index inclusion, companies must post two consecutive years of positive earnings per share. As a buffer, companies are dropped from the index after posting two consecutive years of negative earnings. The index is weighted by float market cap and is rebalanced semiannually in March and September.

  1. What additional indices are offered within the S&P Global    SmallCap Select Index Series?

The S&P/ASX Small Ordinaries Select Index follows the same index methodology framework utilized in our S&P Global SmallCap Select Index Series. We currently  offer the following regional indices within the S&P Global SmallCap Select Series (see below).

pdf-icon PD F Download Full Article
Processing ...