Indexology^® Blog

While I was eating at a well-known restaurant chain, I saw this sign in the front window:

So of course as a commodity lady my mind doesn’t think about choices like chicken or veggies, but I wonder what happened to the price of beef in the shortage and why is there a shortage?  

The S&P GSCI All Cattle, which includes both the S&P GSCI Feeder Cattle and Live Cattle, has gained 4.4% since the end of May, after losing 8.6% from the beginning of the year. See the monthly returns in the table below:

An obvious driver is that the grilling season has kicked in, but that is on the demand side. Also on the demand side, as reported in the United States Department of Agriculture (USDA) report on July 11 was U.S. beef exports rose 4.3% in May from a year ago for muscle meats and 2.7% for total beef and beef variety meat sales. The increase was from a 74% increase in sales to Japan, which eased its age requirement on U.S. beef to cattle under 30 months of age from 20 months or younger.

In addition to the rising demand, the summer heat has disrupted supply since cattle eat less when it’s hotter outside. Also the drought conditions have affected rangelands, leaving little water and forage for livestock, prompting the Bureau of Land Management (BLM) to undertake targeted actions, such as reducing grazing.

Last year beginning in May, the S&P GSCI All Cattle had a 4 month winning streak driving the index up 7.9% before a small dip in Sep of 1.1%. By the year’s end the index gained 13.3% from the trough in Apr. Could the drought in 2013 drive similar shortages and higher returns as from the 2012 drought? Compare droughts here.

We read this morning that the California Public Employees’ Retirement System (CalPERS) is considering increasing its commitment to passive equity vehicles. This follows, by less than two weeks, a study suggesting that public pension funds generally could improve their performance by doing exactly what CalPERS is reported to be considering.

Of course whenever you speak about CalPERS, you’re speaking about enormous size (at $256 billion, the nation’s largest pension fund), and the fund’s size may be a key to its plans. For CalPERS to move its figurative needle, it needs to generate a huge amount of active investment return. As readers of our SPIVA reports know, most active managers underperform most of the time, so CalPERS may well conclude that the active management game isn’t worth the candle, especially at the scale required for their asset base. If that’s what they decide, it would be a hard conclusion to dispute.

Dividend focused strategies as well as strategies offering exposure to alternative income sources have become popular and proliferated over the past few years given the low interest rate environment.  Throughout history, dividends constitute an important part of total equity return. In decades such as the 40s and the 70s, dividends constitute 50% or more of the equity markets returns whereas during the 90s, dividends made up only 14% of the total return with capital appreciation making up the rest.  In addition, academic research has shown that dividends offer protection during bear markets.  It must be noted that, while dividends offer benefits, not all dividend strategies or dividend indices are constructed the same.  Some indices are designed with the specific purpose of absolute high yield, some focus on stable, consistent dividend growth and others encompass a bit of both.  Nearly all dividend indices employ quality measures to ensure their objectives are achieved.  During our webinar this Thursday on dividends, we will breakdown the methodology construction behind several leading dividend indices as well as highlight how different index mechanics can lead to different risk/return profiles and sector compositions.

Picking the right ETF among the hundreds that are currently available is certainly a formidable task for many investors – one that has been made more difficult by iShares recent announcement that it is removing index names from a number of its ETFs. Why should this raise concerns for investors and for the financial industry overall? Well, simply stated, it’s a transparency issue. As investors will no longer be able to determine the index that underlies an ETF just by looking at the ETF name, investor transparency has taken a few steps in the wrong direction.

As we have seen with the issues facing LIBOR and Reuters/WM, transparency of indices has become a paramount theme for investors. Knowing your exposures and where your potential returns are coming from are vital pieces of information that every investor should be aware of. As a recent Index Universe article pointed out, “the underlying index choice is the single biggest determinant of your returns”, and I couldn’t agree more. Given the growing number of indices available in the marketplace (S&P Dow Jones Indices, itself, calculates and publishes over 830,000 indices) – each with different weighting schemes, components, rebalancing schedules, and stated objectives – it’s absolutely critical that investors know what they are buying when they decide to invest in an ETF.

But what about the index provider? Finding the right index that underlies your ETF is one important step in the process, but knowing the index provider responsible for calculating and publishing the index underlying your fund is another. Does the index provider have a considerable track record in producing stock market indices, is it independent from the product, does it have a team that monitors the index 24/7, does it have a dedicated customer service department, are its benchmarks free of conflicts of interest, is it known for consistently and reliably producing indices, has it secured the necessary data licenses to ensure the ongoing calculation of the index, and does it utilize a transparent system comprised primarily of independently sourced pricing? With over 125 years of experience producing uncompromised indices and benchmarks, S&P Dow Jones Indices has worked tirelessly to ensure that our brand meets all of the above criteria while consistently and reliably serving as the seal of approval for markets both domestic and abroad.

Knowing the characteristics of the index underlying a fund, as well as the history, expertise and the integrity of the index provider are critical pieces of information that all investors should have upfront. In a time when financial market transparency is being called into question, it’s important that investors have at their fingertips the relevant information necessary to make an educated and informed investment decision.

Click here and watch Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices discuss last week’s market performance.