IN THIS LIST

The Relevance of U.S. Equities to Japan

More Equal than Others: 20 Years of the S&P 500 Equal Weight Index

ETFs in Insurance General Accounts – 2023

Approaches to Benchmarking Listed Infrastructure

Diversifying Israel’s Home Bias with U.S. Equities

The Relevance of U.S. Equities to Japan

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

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Cristopher Anguiano

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

Executive Summary

U.S. equities represent a significant portion of the global equity opportunity set, with characteristics that offer potential diversification benefits for Japanese markets.  In this paper, we:

  • Outline the global relevance of the U.S. equity market;
  • Illustrate the U.S. equity market’s distinct sector exposures;
  • Demonstrate how the inclusion of U.S. equities might improve risk and returns; and
  • Summarize the record of actively managed equity funds in comparison to S&P DJI’s flagship equity benchmarks.

The Size and Relevance of the U.S.

The U.S. equity market represents a sizeable portion of the global equity opportunity set.  Exhibit 1 shows that U.S.-domiciled companies accounted for 59.3% of the float market capitalization of the global equity universe at the end of June 2023, nearly nine times larger than the Japanese equity market (6.6%).  

The Relevance of U.S. Equities to Japan: Exhibit 1

Beyond U.S. Large Caps: The S&P 1500®

Launched in 1995, the S&P Composite 1500®—otherwise known as the S&P 1500—is designed to measure the performance of the U.S. equity market.  The S&P 1500 is a float market capitalization-weighted combination of three component indices: the S&P 500®, S&P MidCap 400® and S&P SmallCap 600®, covering the large-, mid- and small-cap U.S. equity segments, respectively.  Each index follows the same comprehensive, rules-based and transparent methodology, which has historically helped the S&P 1500 to avoid less liquid, lower priced and lower quality stocks.

Although the large-cap segment represents a sizeable portion of the U.S. equity market—on average, the S&P 500 accounted for over 80% of the U.S. stock market, historically—the breadth and depth of the U.S. equity market means that smaller U.S. size segments are as large as some countries’ equity markets.  For example, taken as standalone countries, the S&P MidCap 400 and S&P SmallCap 600 would have been the 4th and 12th largest countries in the S&P Global BMI, respectively, at the end of 2022.

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More Equal than Others: 20 Years of the S&P 500 Equal Weight Index

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Grace Stoddart

Quantitative Associate, Index Investment Strategy

S&P Dow Jones Indices

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Tim Edwards

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

Summary

It is over 20 years since S&P Dow Jones Indices launched the S&P 500 Equal Weight Index; since then, its live performance has attracted both academic interest and investor capital in related products.  To mark the anniversary, we re-examine the index’s potential as a benchmark for actively managed U.S. equity mutual funds.  Using 20 years of live performance, we show: 

  • The annual excess returns of the average actively managed Large-Cap Core U.S. equity fund (relative to the S&P 500) were correlated to those of the S&P 500 Equal Weight Index.
  • Over the long term, in every major category, nearly all actively managed domestic U.S. equity funds underperformed the S&P 500 Equal Weight Index.
  • These results would not be substantially altered after accounting for the typical frictions that might be associated with a passive investment tracking the S&P 500 Equal Weight Index.

More Equal than Others: 20 Years of the S&P 500 Equal Weight Index: Exhibit 1

Introduction

Offering a simple alternative to the standard capitalization-weighted approach for U.S. blue-chip equities, the S&P 500 Equal Weight Index began publication just over 20 years ago on Jan. 8, 2003.  The index’s performance since launch has been notable, with a total return not only higher than its large-cap benchmark index, but also higher than S&P DJI’s benchmarks for mid- and small-cap U.S. equities, as well as both growth and value indices based on the S&P 500 (Exhibit 2).

More Equal than Others: 20 Years of the S&P 500 Equal Weight Index: Exhibit 2

This outperformance offers a challenging perspective on the results reported in S&P Dow Jones Indices’ SPIVA® Scorecards, which have consistently shown that a high proportion of actively managed U.S. equity mutual funds underperform capitalization-weighted benchmarks.  “Challenging” because—as we shall illustrate—actively managed large-cap equity funds might be expected to benefit during periods when equal-weight indices outperform cap-weighted indices. 

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ETFs in Insurance General Accounts – 2023

Introduction

In 2022, the amount of exchange-traded funds (ETFs) held by U.S. insurance companies in their general accounts dropped 23.5% (or USD 11.2 billion) to USD 36.6 billion.  This represents the first substantial drop in ETF assets since insurance companies started buying ETFs in 2004.  However, two factors complicate analyzing the drop in ETF assets.  The first is the unusual bear market we had in 2022, with both equity and fixed income markets showing sharp declines—the S&P 500® dropped 19.4% and the S&P U.S. Investment Grade Corporate Bond Index dropped 14.3%.  In 2022, insurers withdrew USD 4.1 billion from ETFs, so valuation declines explain approximately two-thirds of the drop in AUM.  Also in 2022, two Mega insurers decided to exit all public equites, including ETFs.  This represented USD 3.5 billion of all the withdrawals.  Excluding these two companies from the analysis, insurer ETF AUM declined by 16.5%—or in line with market results.

Even though most U.S. insurer assets are in Fixed Income, insurers typically invested in Equity ETFs.  This continued to be the case, even with the large amount of Equity ETFs sold by the two Mega companies.  Outside of these two companies, we saw flows into Equity ETFs and away from Fixed Income ETFs.

In our eighth annual study of ETF usage in U.S. insurance general accounts, we also analyzed the trading of ETFs by insurance companies.  For the second consecutive year, trade volume declined; however, the overall trend remains positive, with 2022 trade volume increasing 350% over 2015 trade volume.

Holding Analysis

Overview

As of year-end 2022, U.S. insurance companies invested USD 36.6 billion in ETFs.  This represented only a fraction of the USD 6.5 trillion in U.S. ETF AUM and the USD 7.9 trillion in invested assets of U.S. insurance companies.  Exhibit 1 shows the growth of ETFs by U.S. insurance companies over the past 18 years.

ETFs in Insurance General Accounts – 2023 : Exhibit 1

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Approaches to Benchmarking Listed Infrastructure

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

Investing in infrastructure has become popular among institutional and private investors in recent years. Investors could be attracted to the potentially long-term, low-risk and inflation-linked profile that can come with infrastructure assets, and they may find that it is an alternative asset class that could provide new sources of return and diversification of risk.

Why Consider Investing in Infrastructure?

Infrastructure assets provide essential services that are necessary for populations and economies to function, prosper and grow.  They include a variety of assets divided into five general sectors: transportation (e.g., toll roads, airports, seaports and rail); energy (e.g., gas and electricity transmission, distribution and generation); water (e.g., pipelines and treatment plants); communications (e.g., broadcast, satellite and cable); and social (e.g., hospitals, schools and prisons).  Infrastructure assets operate in an environment of limited competition as a result of natural monopolies, government regulations or concessions.  The stylized economic characteristics of this asset class include the following.

  • Relatively steady cash flows with a strong yield component: Infrastructure assets are generally long lived. Most companies have long-term regulatory contracts or concessions to operate the assets, which can provide a predictable return over time.  As a result, infrastructure assets have the potential to generate consistent, stable cash flow streams, usually with lower volatility than other traditional asset classes.
  • High barriers to entry: Due to significant economies of scale, infrastructure assets are often regulated in such a way that discourages competition. The high barriers to entry often result in a monopoly for existing owners and operators.
  • Inflation protection: Revenues from infrastructure assets are typically linked to inflation and are often supported by regulation. In certain instances, revenue increases linked to inflation are embedded in concession agreements, licenses and regulatory frameworks.  In other cases, owners of infrastructure assets are able to pass inflation on to consumers via price increases, due to the essential nature of the assets and their inelastic demand.

Consequently, the infrastructure asset class may provide investors with a degree of protection from the business and economic cycles, as well as attractive income yields and an inflation hedge.  It could be expected to offer long-term, low-risk, non-correlated, inflation-protected and acyclical returns.

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Diversifying Israel’s Home Bias with U.S. Equities

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Sherifa Issifu

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

Executive Summary

Investors in most countries exhibit a home bias, but it is particularly acute in Israel.  On average, Israeli investors allocate a higher amount to domestic equities than their developed market peers in the U.K, Europe and Canada, and thus may not be fully accessing the potential benefits of global diversification.  This paper provides ample opportunities to consider the historical benefits of international diversification, including with U.S. equity indices.

In this paper, we:

  • Compare and contrast U.S. equity indices (S&P 500®, S&P MidCap 400® and S&P SmallCap 600®) with Israeli equity indices (TA-35 Index and TA-125 Index);
  • Show that any hypothetical combination of U.S. equity indices with Israeli equity indices would have outperformed the Israeli market in isolation since December 1994;
  • Explore diversification via sector exposures and geographic revenues; and
  • Explain the primary reason for the growth of passive investing: most active managers have underperformed their benchmarks over most time periods.

Long-Term Performance of U.S. and Israeli Equities

In this paper, we are using the prevalent local equity benchmarks for Israel, which are produced by the Tel Aviv Stock Exchange (TASE).  For a large-cap comparison to the S&P 500, we will use the TA-35 Index, which is Israel’s flagship index and tracks the 35 largest companies listed on the TASE.  In instances where we are looking at the Israeli equity market more broadly, the TA-125 Index will be used. 

Exhibit 1a and Exhibit 1b highlight that the S&P 500 significantly outperformed the Israeli market, as represented either by the blue-chip TA-35 Index or the broad market TA-125 Index, by 2% annualized since Dec. 31, 1994.  The outperformance of the S&P MidCap 400 and S&P SmallCap 600 was even more impressive, with the two beating the U.S. large-cap benchmark by 2% and 1%, respectively, over the last 28 years.  The S&P 500, S&P 400® and S&P 600® all outperformed the Israel indices on a risk-adjusted basis as well. 

Diversifying Israel’s Home Bias with U.S. Equities: Exhibit 1

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