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Colombia — Innovation in Indexing

A Quick Look at SPIVA India

The VIX is at a crossroads - mind the gap.

The Best Offense

What Ails the Market?

Colombia — Innovation in Indexing

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Jasmit Bhandal

Index Specialist

Horizons ETFs Management (Canada) Inc.


If the world were a simpler place, we would have one index per market. However, this is far from the case. Markets have multiple indices, and deciding which index provides the best exposure is no easy feat. This is especially true in developing markets like Colombia, where multiple indices are jockeying to be the “market benchmark.”

Looking back at the early days of indexing, the formula for the Dow Jones Industrial Average (DJI) was as simple as aggregating the prices of the largest stocks in the U.S. market and then dividing by the number of stocks. Times have changed. The level of complexity involved with index construction has increased, and thus, determining the choice of benchmark is a challenging task.

Currently, there are various indices representing the local Colombian market such as the COLCAP Index and the S&P Colombia Select. The COLCAP Index is managed by the local equity exchange and was relaunched with new methodology in 2013. The S&P Colombia Select Index is new on the scene and launched earlier this year.

Typically, a traditional market capitalization index with robust liquidity and market cap screens will usually suffice as a market benchmark. Using a GICS® framework for comparison, only 6 of the 10 sectors are reflected in either Colombian index (see Exhibit 1). These indices do not include securities from sectors such as healthcare, consumer discretionary or telecommunications.

This creates potential sector and company risk due to concentration within the index. The S&P Colombia Select Index mitigates some of this risk by placing caps on the stock and sector concentrations. Stocks are limited to a 15% weight in the index, while sectors are capped at 40%. Energy is the sector with the biggest difference in weight between the two indices. The S&P Colombia Select Index has a significantly lower energy weight at 12.13% versus 18.51% for the COLCAP Index.

When constructing an index, there is a tradeoff between representativeness and investability. In markets such as Colombia, this is the single biggest determinant of risk exposure and liquidity of the constituents. The trick is to then construct an index that seeks to measure Colombian equities while also mitigating significant sector and liquidity risks. One of the unique aspects of the S&P Colombia Select Index is its innovative weighting technique, which considers trading volumes in order to improve the liquidity profile of the index. This helps support low-cost replication in a relatively illiquid market.

We are starting to see the evolution of index construction; index providers are recognizing that the key determinants of an index’s effectiveness are controlling risk and efficiently replicating index constituents.

A pure market cap weighting approach can be highly effective in many developed market indices. However in smaller markets, where concentration and liquidity risks are more common problems, it’s imperative that the index take these factors into account.

The above table has applied GICS sector classification to the COLCAP index for illustrative purposes only. The COLCAP index does not use the GICS system. The COLCAP index uses its own proprietary industry classifications for classifying securities. GICS is an industry classification scheme jointly developed and administered by S&P DJI and MSCI.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

A Quick Look at SPIVA India

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Utkarsh Agrawal

Associate Director, Global Research & Design

S&P Dow Jones Indices


The SPIVA India Scorecard reports on the performance of actively managed Indian mutual funds versus that of their benchmarks, showing equal-weighted peer averages.  The mid-year 2014 scorecard, the latest SPIVA India report, has revealed that while active funds may be able to outperform their benchmarks in the short term, it becomes more likely for active funds to be outperformed by their benchmarks over the three- and five-year periods.

SPIVA Table 1

Some of the key findings from the report including the following.

  1. The Indian stock market has remained bullish over the one-year period ending in June 2014. During this time horizon, the S&P BSE 100, the S&P BSE 200 and the S&P BSE MID CAP gained 35.37%, 36.43% and 59.93%, respectively.  Over the same one-year period, 34.18%, 22.22% and 44.93% of the active funds in the Indian equity large-cap, Indian ELSS and Indian equity mid-/small-cap categories underperformed their respective benchmarks.
  2. Over the five-year period ending in June 2014, 54.36% of the active funds in the Indian equity large-cap category underperformed their benchmark, and close to 17% of the funds were merged or liquidated.
  3. Over the same five-year period, active funds in the Indian equity mid-/small-cap category had a survivorship rate of only 77.33%, given the higher volatility of this market segment. In contrast, the active funds in the Indian ELSS category had a survivorship rate of 97.14%, which is not surprising given the fact that there is a lock-in period of three years for this group.
  4. The S&P India Government Bond Index and the S&P India Bond Index gained 3.78% and 4.24%, respectively, over the one-year period ending in June 2014. Over the same one-year period, 59.62% and 29.82% of the active funds in the Indian government bond and the Indian composite bond categories underperformed their respective benchmarks.
  5. The percentage of active funds in the Indian government bond category that underperformed the benchmark over the five-year period ending in June 2014 was 78.18%, which can partly be attributed to higher interest rates.
  6. Over the same five-year period, the survivorship rate of the active funds in the Indian composite bond category was 92.86%, but the number of funds that underperformed the benchmark was 53.01%.

SPIVA Table 2

Let’s also look at shorter time periods ending in June 2014.

SPIVA Table 3

  1. Most of the active funds in the Indian equity large-cap category and the Indian ELSS category were able to outperform their benchmarks over the one-, three- and six-month periods, and they outperformed the benchmark over the one-year period ending in June 2014, as well.
  2. Active funds in the Indian mid-/small-cap category lagged the benchmark over the one- and three-month periods.
  3. As interest rates remain high, most active funds in both the Indian government bond and Indian composite bond categories underperformed their benchmarks over the three- and six-month periods.
  4. The survivorship rate was 100% only for the Indian ELSS and the Indian government bond funds over the six-month period.
  5. The number of funds available to investors in the Indian composite bond category has increased by almost 7% over the six-month period ending in June 2014.

SPIVA Table 4


The posts on this blog are opinions, not advice. Please read our Disclaimers.

The VIX is at a crossroads - mind the gap.

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices


As you, dear patient reader, have no doubt noticed, volatility is back. The VIX® has reached levels not seen since the peak of the Eurozone crisis over two years ago. The exact reasons might be debatable, but either way October is living up to its perennial reputation as the cruelest month for equities.


Source: CBOE

Each time in recent history that the VIX closed above 20, it has rapidly collapsed (see above). And duly following the principle of induction, spikes in volatility are now interpreted as a selling opportunity (in respect of the VIX) by the average punter.  One example of this demand: the largest exchange-traded product providing a short exposure to VIX futures has doubled in shares outstanding in the last few days:


Source: Bloomberg, as of Oct 15th 

Yet volatility levels are not guaranteed to fall. If the U.S. Federal Reserve’s largess was indeed the primary cause of the suppressed levels of volatility seen in the first three quarters of this year, the seat-belts are off. QE3 is expected to end in the next few weeks; history was not kind to equity investors in the periods immediately following the last two rounds:


Source: S&P Dow Jones Indices

It requires an unusual degree of foresight, bravery or foolishness to take short positions in the VIX; there are, notoriously, considerable stings in the tail. Moreover, it is a bet framed in terms of death or glory: the VIX rarely resides in the low 20s, instead historically it is brief staging post on the way to crisis or back to recovery.  And despite the enthusiasm for selling volatility at current levels, losses can escalate very quickly if it continues to spike. At some point, those short investors will capitulate; the risk is then a material short squeeze. 

Hypothetically, such a short squeeze would trigger large purchases in volatility futures just as it is already shooting up. A jump from 25 to 35 in such circumstances is not entirely unfeasible. Investors would be wise to mind the gap. 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The Best Offense

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices


Some American football coaches are fond of citing the maxim that the best offense is a good defense — because even if your offense is having an unproductive day, a good defense means that you’re always in the game.

A related principle applies to investing — in some environments, the best way to win is not to lose. The first half of October has been such an environment, as defensive indices, laggards in 2013 and for the first three quarters of 2014, have finally come into their own. The chart below shows how dramatic the reversal of fortune has been:

Index                                               First 3 Qs      October to 10/13         YTD

S&P 500                                             8.34%                  -4.88%                3.06%

S&P 500 Dividend Aristocrats            6.52%                  -2.99%                3.33%

S&P 500 Low Volatility                        7.54%                  -1.46%                5.97%

S&P Dynamic VEQTOR                      4.05%                   0.03%               4.08%

We’ve chosen, admittedly somewhat arbitrarily, only three defensive indices, which achieve their defensive character in different ways. The S&P 500 Dividend Aristocrats Index comprises stocks which have increased their dividends for at least 25 consecutive years, and can be thought of as both a yield and quality play. The S&P 500 Low Volatility Index holds the 100 least volatile stocks in the S&P 500 and tries to exploit the so-called low volatility anomaly. Dynamic VEQTOR is a multi-asset index which owns both the S&P 500 and a long position in VIX index futures.

What these indices have in common is that they offer protection from declining markets and participation in rising markets. We hasten to say that it’s not complete protection and it’s not full participation — they can still lose money when the market goes down (as, indeed, the Aristocrats and Low Vol did in early October), and they will typically lag a rising market (as all three indices did in 2013). But for investors who like the idea of attenuating the downside, and are willing to pay for it by forgoing part of the upside, such defensive indices can provide a very attractive pattern of return.

All three indices lagged their parent S&P 500 through the first three quarters of 2014, all three mitigated the market’s decline during the first 13 days of October, and all three are, perhaps somewhat improbably, ahead of the market on a year-to-date basis. Of course, that tells us nothing at all about the course of future performance. What the first 13 days of October gave, the next 13 could take away.  But in the meantime, investors who opted for a defensive index strategy are getting what they paid for.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

What Ails the Market?

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices


Everyone wants an explanation. Cataloged below are popular explanations with each rated as plausible, contributing, possible, or unlikely.

Falling oil prices – bad news for energy stocks but good news for the rest of the economy, especially for consumers.  A few years back everyone was wishing for cheaper gasoline and now that it is almost here we blame it for falling stock market. Contributing

Slow growth in Europe and recession risks in Germany – Europe’s economy is barely growing and near term prospects suggest further weakness. Everyone likes what the European Central Bank says, but no one believes it can provide enough monetary stimulus to make a real difference.  A German recession would hurt the rest of Europe, dampen some of the US economy’s strength and deter some pending tax inversion M&A deals. Plausible

China — In China 7.5% real growth is slow, and it is likely to get slower still. China faces both short term and long term economic challenges and sorting them out won’t happen overnight.  Exports are likely to continue and there will be new cell phone models in 2015, but China may no longer be the buyer of last resort for all natural resources.  The direct impact on the US markets is less than the risk of a European recession, but China is certainly a contributing factor

The end of QE – When the Fed began quantitative easing everyone said it was a mistake. Then everyone said it raised asset prices, including stocks. Now that it is ending, everyone is worried what happens when it goes away.  The announcement and the associated anxiety do more damage than QE itself.  We survived the “Taper Tantrum” last year and will survive the final end of QE, which, by the way, is almost gone. Unlikely

The Fed – Setting aside QE, some investors always blame the Fed, either for what they did, or didn’t do. Over the weekend Stanley Fischer, the Fed Vice-Chairman suggested that economic weakness in Europe and emerging markets might lead the Fed to delay any interest rate increases.  For the moment, the Fed is not the problem. Unlikely

Geopolitics, Ebola, and ISIS – All these worry people and those worries combine with the market worries to encourage selling.  If ISIS were routed, Ebola was only found in bad thriller novels and no one wanted to sanction someone, would a 5% market pullback make the six o’clock news? Plausible

The S&P 500 is falling – Can we blame that market’s decline on the market? One factor cited by market analysts is that the S&P 500 has fallen far enough to test its 200 day moving average.  In research done following the 1987 stock market crash, Robert Shiller asked investors what factors they cited for the market crash; their response was the sharp declines the week before the crash.  Crowd psychology plays a part. The title of one of first analyses of markets and manias was Extraordinary Popular Delusions and the Madness of Crowds.  Contributing


Do we know why the market is down? No. Maybe there isn’t an explanation.  The US economy is doing okay – unemployment is down, inflation is low, there are hints that wages may be rising and the economy is growing.  This is the fourth time this year the S&P 500 dropped about 100 points. The market has successfully forecasted about seven of the last two recessions.  Remember that the market will fluctuate and is virtually unpredictable.

The posts on this blog are opinions, not advice. Please read our Disclaimers.