- 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.
