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In This List

Apple Set to Join the Dow Jones Industrial Average

Don’t Lose Sight Of Sector Exposures Within Factor Indices

Smart Rolls Rise From Select Agriculture

European Equities Ripping Into 2015: Is It Just The ECB?

February Made Bonds Shiver, While Energy Kept High Yield Warm

Apple Set to Join the Dow Jones Industrial Average

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Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

S&P Dow Jones Indices announced that Apple (AAPL) will be added to the Dow Jones Industrial Average, replacing AT&T (T), after the close of business on March 18, 2015; release attached.

All data is based on last night’s close, and will be finalized after the close of March 18, 2015. 

American Telephone & Telegraph was added to the Dow Jones Industrials on October 4, 1916.  It was rename AT&T on April 20, 1994, and deleted from the Dow on April 8, 2004.  On November 1, 1999, SBC Communications, which formerly was Southwestern Bell, one of the seven ‘baby bells’ spun-off by AT&T in 1982 (Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and US West – all 7 were added to the S&P 500), was added to the Dow.  On November 21, 2005 AT&T merged into SBC Communications, with SBC Communications renaming itself AT&T, which is the issue being removed now. After the change, Verizon, which was also one of the original seven spun-off, Bell Atlantic, will be the only telecommunications issue left in the Dow.

The change in membership will occur as Visa does a 4-for-1 stock split, which will have an impact on the index since the Dow is price weighted.  Overall, the changes will reduce the weighting of information technology from 19.17%, down to 17.05%, since Visa’s 4-for-1 stock split outweighs Apple’s addition (even as the full market value weighting, such as the methodology used for the S&P 500, will change information technology’s market value to 30.92% of the Dow’s market weight, from the current 19.71%). Telecommunication’s index weight will be reduced to 1.80%, from the current 2.94%, as Verizon becomes the only issue representing the sector in the Dow.

As of last night’s close (3/5/15), the split, combined with the membership change, will reduce Visa’s position in the price-weighted index from #1, at their current $274.13 price, to #21, at $68.53, reducing its weighting percentage from 9.71% to 2.53%.  Goldman Sachs will be take over the #1 weighting position with 7.01% of the weighting, followed by 3M (6.18%), International Business Machines (5.95%), and Boeing (5.70%).  Apple will enter the index in the 5th position, accounting for 4.66%, even as it is the largest publicly traded issue by market value in the world (all subject to change based on the March 18 close).

Visa has been the best performing issue in the Dow since the close of 2013, accounting for approximately 21% of the gain.  To some degree, the impact on the Dow of the split is similar to profit taking, since the gains were locked in and the issue reweighted; at the new weighting, Visa would need to decline 75% in price to negate the 21% gain it added to the Dow since 2013.

Splits in the Dow have been rare (as they have for the S&P 500 and the market in general), with the last stock split in the Dow being a 2-for-1 by Coca-Cola in August 2012, and the one before that being a 2-for-1 by Caterpillar in July 2005; I went back to 1980, but didn’t find a 4-for-1 in the Dow (S&P 5000 members salesforce.com and VF Group did a 4-for-1 in 2013).  Technically, Visa’s 4-for-1 stock split will not count as a Dow split, since it occurs before the addition.

Apple and AT&T, strangely, both pay a $0.47 quarterly dividend ($1.88 annual). However, Apple, at $126.41 yields 1.5%, while AT&T, at $34.00 yields 5.5%.  The change to the Dow will be a slight increase to yields (due to Visa, which yields 0.7%), as it goes from the current 2.29% to a proforma 2.33% (all 30 issues in the Dow pay a dividend).   Apple, which started paying a dividend in March 2012, increased its dividend rate in April 2013 and in April 2014 (see chart – just happen to have one hanging around).

Information technology and telecommunications weighting decline, as the other sectors split the gains

Proforma Dow as of last night: Apple added, AT&T deleted, Visa split 4-for-1

Apple’s dividend history – April 2015? 

Rumors and talk of Apple’s addition to the Dow have been prevalent on the Street for years, and have grown since its 7-for-1 stock split in June 2014
However, the Dow is price weighted, with Apple being 5th in the Dow, as compared to 1st in the S&P 500 (by market value) and twice that of #2 Exxon – bottom line is Apple has weight in the Dow, but it’s not the giant it is in the S&P 500, so don’t expect its impact to be the same, in either direction

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The analyses and projections discussed within are impersonal and are not tailored to the needs of any person, entity or group of persons.  Nothing presented herein is intended to, or should be interpreted as investment advice or as a recommendation by Standard & Poor’s or its affiliates to buy, sell, or hold any security.  This document does not constitute an offer of services in jurisdictions where Standard & Poor’s or its affiliates do not have the necessary licenses. Closing prices for S&P US benchmark indices are calculated by S&P Dow Jones Indices based on the closing price of the individual constituents of the Index as set by their primary exchange (i.e., NYSE, NASDAQ, NYSE AMEX).  Closing prices are received by S&P Dow Jones Indices from one of its vendors and verified by comparing them with prices from an alternative vendor. The vendors receive the closing price from the primary exchanges.  Real-time intraday prices are calculated similarly without a second verification.   It is not possible to invest directly in an index.  Exposure to an asset class is available through investable instruments based on an index.  Standard & Poor’s and its affiliates do not sponsor, endorse, sell or promote any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any S&P Index.  There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns.  Neither S&P, any of its affiliates, or Howard Silverblatt guarantee the accuracy, completeness, timeliness or availability of any of the content provided herein, and none of these parties are responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the content.  All content is provided on an “as is” basis, and all parties disclaim any express or implied warranties associated with this information.  The notes and topics discussed herein are intended to quickly inform and are only provided upon request.  If you no longer wish to receive this information or if you feel that the information does not suit your needs, please send an email to howard_silverblatt@spdji.com and you will be removed from the distribution list.  A decision to invest in any such investment fund or other vehicle should not be made in reliance on any of the statements set forth in this document.  Standard & Poor’s receives compensation in connection with licensing its indices to third parties.  Any returns or performance provided within are for illustrative purposes only and do not demonstrate actual performance.  Past performance is not a guarantee of future investment results.  STANDARD & POOR’S, S&P, and S&P Dow Jones Indices are registered trademarks of Standard & Poor’s Financial Services LLC.

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

Don’t Lose Sight Of Sector Exposures Within Factor Indices

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Justin Sibears

Managing Director, Portfolio Manager

Newfound Research

Broadly speaking, stocks within the same sector are often exposed to similar risk factors.  Investors with large energy sector exposures have certainly been reminded of this over the last six months.  This is precisely why segregating the U.S. equity universe by sector has been so appealing to investors over the years.  Over the last 16 years, the average annual return differential between the best and worst performing sector has been nearly 40%.

At their core, factor-based equity portfolios are nothing more than groups of securities that share common characteristic(s).  For example, the S&P 500 Pure Value Index includes members of the S&P 500 with the most attractive valuations as measured by earnings per share, book value to price value ratio and sales to price ratio.

Putting these two observations together – stocks within a factor portfolio and stocks within a sector sharing risk factors – it should be no surprise that pure factor portfolios can have sector concentrations that differ substantially from market-cap weighted benchmarks.

Within our U.S. Factor Defensive Equity strategy, we consider five factors: momentum, value, dividend growth, low volatility and small-cap.  The table below presents the current sector weights for five S&P indices that represent these factors.  Along with the sector exposures, we calculate a “Sector Diversification Score” for each of the factors as well as the overall S&P 500.  A Sector Diversification Score of 0 would indicate 100% exposure to a single sector while a Sector Diversification Score of 100 would indicate equal exposure to each of the nine sectors.

Capture

Four of the five factor indices tilt significantly – greater than 10 percentage points – away from the individual sector weights of the S&P 500.  This should not be worrying in the least bit.  If a portfolio looks exactly like a market-cap benchmark, then we surely can’t expect it to do any better than a market-cap weighted benchmark in helping an investor achieve investment goals.

However, it does highlight the need to keep an eye on sector exposures as factor products are incorporated into investor portfolios.

Our U.S. Factor Defensive Equity strategy holds all five of the factors discussed in inverse proportion to their volatility.  The weights in our portfolio as of 1/31/15 are shown below.

Dividend Growth Low Volatility Momentum Small-Cap Value
22% 24% 19% 19% 16%

By building a diversified factor portfolio we are able to increase sector diversification relative to the broad market.

Capture

One final point to keep in mind is that by definition factor-based portfolios and indices will rebalance more often than a market-cap weighted benchmark as the characteristics of the stocks in the overall universe change.  Naturally, these rebalances mean that the sector allocations will change over time.  The velocity of these changes will vary on a factor-by-factor basis.  More frequent changes will be seen in factors that have a price component, including value and momentum.

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

Smart Rolls Rise From Select Agriculture

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Jodie Gunzberg

Former Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

The oil price drop has precipitated a flurry of interest around enhanced oil indices since the benefits of enhancing rolls in energy are well understood from the obviously costly storage situations in oil. Below is a chart of the ten year cumulative return of the S&P GSCI Crude Oil Total Return versus the S&P GSCI Crude Oil Enhanced Total Return.

Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results.  Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.
Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results. Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.

As investors have been interested in oil, questions have come up about the enhanced roll for agriculture since it can also be difficult to store. To shed some light on the return enhancement in agriculture, below is an analysis comparing the S&P GSCI Enhanced Agriculture Select and the S&P GSCI Agriculture Select.  The analysis in the “select” version is easier to understand given just four commodities: Chicago wheat (wheat), corn, soybeans and sugar.  The enhanced rolls are seasonal and are as follows:

  • Wheat is rolled into the December contract annually during the November roll period
  • Corn is rolled only to the July contract annually during the May roll period
  • Soybeans follow the regular S&P GSCI roll schedule
  • Sugar is rolled only to the March contract annually during the February roll period

The weights are based on world production and notice through time since 1995 that wheat has decreased while soybeans have increased but corn and sugar have been more cyclical. The chart below shows the daily historical weights of each commodity in the S&P GSCI Agriculture Enhanced Select. On average wheat was 33.2%, corn 32.9%, soybeans 19.2% and sugar 14.7%. Wheat is now 27.4%, less than its historical average. Sugar is currently at 13.0%, which is also less than its historical average. Corn and soybeans are currently weighted at 35.1% and 24.6%, both above their averages.

Historical Weights

Next, the chart below shows the cumulative performance of daily index returns of the S&P GSCI Agriculture Enhanced Select and the S&P GSCI Agriculture Select.  There is an outperformance of 98.8% from the enhanced rolling strategy.

CumPerf

This is important since there is evidence the commodities “to be grown” have fallen in price through time. One study done by Bessler and Wolff in Aug., 2014, showed “while aggregate commodity indices, industrial and precious metals as well as energy improve the performance of a stock-bond-portfolio for most asset-allocation strategies, we hardly find any portfolio effects for agricultural and livestock commodities.” Further, according to this study by Jacks, real prices for “commodities to be grown” fell by roughly 33% in real terms from 1950.

Source: March 2015. David S. Jacks, Simon Fraser University and NBER
Source: March 2015. David S. Jacks, Simon Fraser University and NBER

However, when the rolling of agriculture futures contracts is employed strategically according to seasonal adjustments, it has been significantly positive.  The chart below shows the difference in monthly roll yield (excess return – spot) of the S&P GSCI Agriculture Enhanced Select less the S&P GSCI Agriculture Select. On average, the enhanced roll added 39 basis points per month.  Cumulatively, this has compounded to add 144.7% from Jan 1995 – Feb 2015.

Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results.  Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.
Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results. Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.

If Jacks is correct in pointing out the transition from fixed capital accumulation to a consumption-based economy, and suburbanization is tentatively beginning, then it may be likely to see an increase in demand for goods “to be grown” and an inflection in long-run trend. The sub-trend pricing for goods “in the ground” could be the formation of a new cycle in the medium run. So if it is time for agriculture, an enhanced roll might make sense.

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

European Equities Ripping Into 2015: Is It Just The ECB?

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

If there is one thing that the large stimulus programs enacted by central banks in the U.S., U.K. and Japan over the past few years have taught us, it is that they provide a whopping boost to equity markets in the short term.  Is that the only reason Europe is doing so well?

The European Central Bank announced its own €60bn per month bond purchasing program in January, and so far the S&P Europe 350 index of large-cap pan-European stocks has been having its best year ever.  Our end-of-month European dashboard shows a total return of 15% for the first two months of the year; it also shows that every sector and every country represented in the index has gained.

But – as we have seen in Japan – the problem with a rising tide lifting all boats is that the performance of those boats becomes highly dependent on the tide.  Otherwise said, if the stimulus program is all that is supporting the performance of European stocks, then as soon as it is priced in we return to a more volatile, uncomfortable market predicated on the ECB’s next move.

The good news is that this doesn’t seem to be the case.  There are plenty of other reasons to be optimistic about European equities that have nothing to do with Mario Draghi.  Lower energy prices should help the pockets of consumers and businesses, and most economists agree they should act to improve consumption.  Less commonly appreciated, it is actually good news that German workers are striking for higher pay, following a generous deal already completed with the single-largest union.  That’s seen as good news for two reasons: firstly because it helps to assuage fears of deflation, but also because the more expensive German workers are, the more competitive the rest of Europe’s labour force becomes.  Finally, it seems that Greece, her government and their counterparts across Europe will continue to muddle through in compromise.  The risks to markets of a “Grexit” are habitually overstated (Greek equities only account for about 0.2% of the market capitalization of the broad-based S&P Europe BMI), but the uncertainty has plagued markets for half a decade.  From the perspective of sentiment as well as the long-term future of the euro – the outlook is more optimistic than it has been for some time.

Yet, one can always find reasons to be cheerful, if you look hard enough.  So is any of this important?  Or do the ECB’s actions suffice to explain the performance of European stocks?  It’s obviously hard to say definitively, but one way to seek an answer is to look at correlations.  If, day-to-day, stocks have been moving up and down in concert and without respect to their individual circumstances, then it is reasonable to suppose that a shared theme was the dominant driver of performance.  On the other hand, if correlations are relatively low then we might conclude that a widespread combination of factors has been germane.

Source: S&P Dow Jones Indices Dispersion and Correlation Dashboard, February 2015
Source: S&P Dow Jones Indices Dispersion and Correlation Dashboard, February 2015

The results are intriguing.  Just before the turn of the year, the correlation figure for the S&P Europe 350 was recording three-year highs.  So, in advance of the ECB’s announcement it might to be fair to say it was all that mattered.   Since the announcement, however, correlations among European stocks have collapsed to their lowest levels on record.   So the evidence points to a range of factors supporting the performance of European equities, beyond and above the stimulus.  That might be another reason why so many investors are looking to Europe in 2015.

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

February Made Bonds Shiver, While Energy Kept High Yield Warm

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Kevin Horan

Former Director, Fixed Income Indices

S&P Dow Jones Indices

Investment-grade corporate yields widened by 15 bps, as the yield-to-worst of the S&P U.S. Issued Investment Grade Corporate Bond Index moved from a level of 2.16% at the beginning of the month to 2.76% at the end of month.  The price return of the index was -1.44% MTD, but 30 bps of coupon return brought the total return down to -1.15%.  February’s negative return was in contrast to the 2.88% gain in January.  The last time this index had a similar negative monthly return was September 2014’s -1.18%.  As of February 28, 2015, the YTD return stands at 1.70%.

High yield, as measured by the S&P U.S. Issued High Yield Corporate Bond Index, showed a contrasting reaction compared with its investment-grade counterpart.  The S&P U.S. Issued High Yield Corporate Bond Index’s yields went from 6.26% at the start of the month to 5.73% at month’s end.  The index returned 2.25% MTD and stands at 3.08% as of February 28, 2015.  February’s return help add to January’s small return of 0.80%.  With oil back up at USD 50 (as quoted by the NYMEX light sweet crude oil futures), the energy sector (15%) of the S&P U.S. Issued High Yield Corporate Bond Index returned 5.73% in February.  The last monthly return of a similar magnitude was October 2013 (2.36%).

The new-issue loan market is quiet, and market participants don’t see this changing in the near term.  The current continuation of lower rates has helped loans claw back some returns.  For the S&P/LSTA U.S. Leveraged Loan 100 Index, the YTD return of 1.67% is the index’s highest level this year.  For February, the index returned 1.45%, following January’s slow start of 0.20%.

The yield of the S&P/BGCantor Current 10 Year U.S. Treasury Index started February at 1.66% and progressively rose to 2.15% by the middle of the month, as expectation on the timing of a rate increase by the Fed was anticipated.  The end of the month saw the index’s yield reverse, moving from a high of 2.15% to a low of 1.97%, before ending the month at 2%.  Concerns from Europe over Greek funding coupled with a statement from Fed Chair Janet Yellen, which included the word “patience” in regard to rates, contributed to the end-of-the-month drop in the index’s rates.  The index returned -2.83% in February and is at 2.28% YTD as of February 28, 2015.

As of March 2, 2015, the U.S. 10-year Treasury bond is yielding 2.06% on the release of a report showing consumer purchases (adjusted for inflation) rose in January, reigniting the expectation that the Fed will take steps toward increasing rates sooner rather than later.  It is reasonable to expect rates to rise in anticipation of an eventual rate increase by the Fed.

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