EXECUTIVE SUMMARY
- S&P Dow Jones Indices produces three families of value indices—the S&P Value Indices, the S&P Pure Value Indices, and the S&P Enhanced Value Indices. These families were developed with specific objectives in mind and have nuances of which market participants should be aware. In this paper, we use the S&P 500® Value, the S&P 500 Pure Value, and the S&P 500 Enhanced Value Index to illustrate the differences.
- The S&P 500 Value is a broad market, capitalization-weighted index with a large investment capacity for products tracking the index. This makes it a relevant benchmark for performance evaluation, as well as making it suitable for those seeking a traditional “buy-and-hold” index-linked investment implementation with a tilt toward value style. By design, this index has lower value exposure than the S&P 500 Pure Value and the S&P 500 Enhanced Value Index, as well as a lower tracking error against the S&P 500.
- The S&P 500 Pure Value is a high conviction value index. It aims for a higher exposure to the value style than the S&P 500 Value. Its style score weighting tilts aggressively toward value securities, but may limit the investment capacity of the products tracking this index relative to those tracking the S&P 500 Value and the S&P 500 Enhanced Value Index.
- The S&P 500 Enhanced Value Index balances the tradeoff between value exposure and the capacity of products tracking the index. Its modified cap weighting targets the value factor while maintaining weights tied to market capitalization.
INTRODUCTION
Value investing is a well-known strategy that seeks to exploit perceived differences between a security’s price and an assessment of its true underlying worth. As intuitive and straightforward as the strategy sounds, there are several nuances to consider when constructing a value portfolio. At S&P Dow Jones Indices, we offer several value indices for investors with different purposes. An investor should consider carefully which is the most appropriate value index to use.
The S&P 500 Value and the S&P 500 Pure Value are part of the S&P U.S. Style Indices. The S&P 500 Enhanced Value Index is part of the S&P Factor Indices. The style indices are derived from traditional style boxes and are broadly used to determine the investment style of a fund. Factors are the underlying primary drivers of risk and return within a portfolio. Decades of research have documented several factors that provide a premium, such as value, quality, and low volatility. Factor indices are designed to capture those premiums.
The differences between the S&P 500 Value and the S&P 500 Pure Value have been well documented in research by S&P DJI. This paper aims to serve as a complement to the existing research, while focusing on identifying the differences between the S&P 500 Pure Value and the S&P 500 Enhanced Value Index. We will look into the index construction differences among the S&P 500 Value, the S&P 500 Pure Value, and the S&P 500 Enhanced Value Index and then discuss how variations in index construction lead to differences in risk/return profiles, characteristics, and risk exposures.
