IN THIS LIST

A Balanced Approach: Inside the S&P 500 Equal Weight Index

Direct Indexing: Launch of MyIndex™ with S&P DJI and Brooklyn Investment Group

The Impact of Sector Performance through the Years

Analyzing the Impact of Sector Selection

Understanding GARP Strategies

A Balanced Approach: Inside the S&P 500 Equal Weight Index

  • Length 07:32

How can an equal weight approach to U.S. equities help to address concerns around mega-cap concentration? S&P DJI’s Anu Ganti and CME Group’s Joe Hickey explore the S&P 500 Equal Weight Index’s historical performance trends and its potential applications for market participants seeking enhanced diversification.

[TRANSCRIPT]

Michelle Yu:

In today's momentum-driven U.S. equity market, one of the most talked-about themes is the relative dominance of a few well-known mega-cap stocks. Hi everyone, I'm Michelle Yu, and welcome to Asset TV. For more on this topic, I want to welcome in Anu Ganti, Head of U.S. Index Investment Strategy at S&P Dow Jones Indices, and Joe Hickey, Executive Director, Equity Products at CME Group, to discuss equal weight index approaches and the growing ecosystem of exchange-traded vehicles linked to these innovative benchmarks. S&P DJI recently published a paper called Worth the Weight that takes a deep dive into the S&P 500 Equal Weight Index, or EWI for short. And we're going to start with Anu on all this. Anu, what were some of the key findings of the paper? Welcome to the program.

Anu Ganti:

Yes, so you've called out two of the big trends, which are the dominance of mega-cap companies that we've seen, as well as increased momentum. And equal weight strategies may be in focus because diversification can be especially important during periods of elevated concentration like the present. We've seen that U.S. equity market concentration is at historically high levels over the past half century. We've also seen single-stock price trends having unusual signs of extension that increased momentum. And if you look at history, historically, after peaks in concentration, the S&P 500 EWI has tended to outperform. Also, after peaks in momentum, historically, we've seen that the S&P 500 EWI has tended to outperform. So you see that mean reversion taking place. Now let's focus on index design looking at the S&P 500 EWI. Each constituent, so it's the same 500 companies within the S&P 500, is allocated an equal weight, so 0.2% of the index total. Now there's two important consequences of that. One is increased exposure to smaller size. For example, the S&P 500 EWI has roughly 80% of its weight as of the end of the second quarter in the bottom 400 companies. So that's interesting, getting that smaller size exposure. While if you look at the cap-weighted S&P 500, it only had roughly 27% weight in the bottom 400 companies. So that's one. The other effect is from the quarterly rebalance of selling the relative winners and buying the relative losers gives you this anti-momentum bias. So, if you put that together, the smaller size exposure as well as the anti-momentum bias, over the long term, we've seen that the S&P 500 EWI has outperformed over more than 20 years of live history and over the hypothetical back-tested history going back to 1970.

Michelle Yu:

Now, I want to shift the attention now and break down why an equal weight index is considered an attractive option for CME and also what benefits could we see in using this approach compared to other indexing methods? And I think Joe has some answers for us. Hello.

Joe Hickey:

Hello, certainly. Thank you, Michelle. Client conversations around concentration risk facing equity investors led us to launch the E-mini S&P 500 Equal Weight Future in February of this year. It was a slow start, but the theme of less concentration and more diversification has resonated with investors. In the last three months, daily traded volume has grown to over 900 contracts a day, or USD 130 million notional. We've seen product use across all of our client types, from market makers, banks, hedge funds and asset managers. Adoption has led to a single-day volume trading record of nearly 14,000 contracts last month, and open interest stands at over USD 2.2 billion currently. Spread trading is an important strategy for futures traders, as we designed the E-mini S&P 500 Equal Weight Future (EWF) to trade at a 2-to-1 notional ratio with the E-mini S&P 500 Future (ES). Given the ease of spread trading at CME, we see many global participants trading spreads against other equity products as well. This highlights the CME value proposition of capital efficiency, where traders are able to receive margin offsets in their diversified portfolio of long and short positions.

Michelle Yu:

Now I think something that viewers want to know is, are there other financial products based on the S&P 500 EWI? And also, how do the sector allocations compare with the S&P 500? Anu.

Anu Ganti:

Yes, so in addition to derivatives that Joe talked about, there are also ETFs, index funds based on the S&P 500 EWI across markets and across regions. Now coming to your question on sectors. It is very interesting because the S&P 500 EWI can have different sector allocations versus the S&P 500. For example, as of the end of the second quarter, the S&P 500 EWI had a greater exposure to Industrials. It also had less exposure to Information Technology. But that's not what drove the long-term outperformance. Our research found that it was actually intra-sector weighting, or weighting within sectors like Financials, Industrials and Health Care, that really drove the long-term outperformance. And a final note is, we're talking about the outperformance of mega caps over the past year. So we've seen that the S&P 500 EWI unsurprisingly has underperformed. But Q3 was interesting because we saw the reversal with the recovery of smaller caps and the S&P 500 EWI has outperformed since then. So that is something that we're closely watching.

Michelle Yu:

And Joe, what are some major trends that you're seeing in equity index products?

Joe Hickey:

Execution precision remains a top priority to clients. One trading functionality heavily used is BTIC, or basis trade at index close. This tool enables market participants the ability to execute at the official close of the underlying index plus a basis. This is useful for institutional investors because it allows traders access to one of the most liquid points of the day, the cash close, when net asset values are calculated. Year-to-date, BTIC volumes are up over 20% across all equity index products, with more than USD 22 billion traded daily. All in all, CME equity products' ADV is up 17% versus Q3 of last year. And when we zoom in on the E-mini S&P 500 Futures (ES), we see a huge share of volume traded daily, about USD 370 billion notional. That's more than 10 times the volume of the next three top traded S&P 500 delta one instruments combined. This highlights the importance of ES as a source of price discovery to the marketplace.

Michelle Yu:

Alright, well we're going to stop on that thought. Joe, Anu, thank you both for joining me here today. To learn more about equal-weighted strategies and why they may be relevant in today's concentrated market, and to explore the paper about the S&P 500 Equal Weight Index, Worth the Weight, and other S&P DJI research, go to www.spdji.com. I'm Michelle Yu. Thanks so much for watching Asset TV.



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