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Will History Repeat Itself in Feb. 2016?

Dividend and Low Volatility-Investments

Does it Have to Be Active OR Passive? Why Not the Best of Both Worlds?

Homes In These Two Cities May Shelter Better Than Gold

Volatility Rides Again

Will History Repeat Itself in Feb. 2016?

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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The year 2016 appears to have gotten off to a similar start to the beginning of 2015.  The S&P 500® Bond Index has returned 0.92% as of Feb. 8, 2016, while in 2015 the index was up 1.57% as of Feb. 8, 2015.  Maybe the month of February will end up being more similar than investors might want.  The yield-to-worst of the S&P 500 Bond Index ended February 2015 13 bps wider than where it began the month.  The same might be true this year, as the yield of the index, at 3.55% as of Feb. 8, 2016, is almost even to January’s 3.56% so the question is whether yields widen out from here as they did last year.

By now, many have heard the news go on about the lower prices of oil and materials.  The S&P 500 Energy Corporate Bond Index has lost 3.71% YTD, followed by a 0.87% YTD drop in the S&P 500 Materials Corporate Bond Index.

Unlike recent index performance, January’s and February’s spread widening has crept into industry sectors other than energy and materials.  Excluding energy and materials, the largest changes in option adjusted spread (OAS) to U.S. Treasuries have been seen in the telecommunication services (up 51 bps) and consumer discretionary (up 41 bps) sectors.

Exhibit 1: OAS History of the S&P 500 Bond Index Industry Sectors
OAS History of the S&P 500 Bond Index Industry Sectors

Source: S&P Dow Jones Indices LLC.  Data as of Feb. 8, 2016.  Past performance is no guarantee of future results.  Chart is provided for illustrative purposes.

Related to the widening of the industry sector spreads is the widening of the credit rating indices.  Of note is that the current OAS level of 235 bps for the S&P 500 BBB Investment Grade Corporate Bond Index has risen close to the starting point of 287 bps seen back in June 2015 for the S&P 500 BB High Yield Corporate Bond Index.

Exhibit 2: OAS History of the S&P 500 Bond Index Rating Categories
Blog_20160209 Exhibit-2

Source: S&P Dow Jones Indices LLC.  Data as of Feb. 8, 2016.  Past performance is no guarantee of future results.  Chart is provided for illustrative purposes.
Total Rate of Return Performance for the S&P 500 Bond Index And Its Sub-Indices

Source: S&P Dow Jones Indices LLC.  Data as of Feb. 8, 2016.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes.

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

Dividend and Low Volatility-Investments

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Todd Rosenbluth

Director of ETF and Mutual Fund Research

S&P Capital IQ Equity Research

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It’s been a tough start to the new year for the S&P 500®, with a 6.4% decline (as of Feb. 3, 2016).  However, the year-to-date performance of certain factor-focused smart-beta indices tied to subsets of the S&P 500 is relatively bright.

The S&P 500 is a well-diversified US equity index, seeking to provide exposure to companies with various characteristics.  While some of these factors, such as growth or high beta, can be viewed as cyclical and  may tend to lead an index constituent to perform well in a “risk-on” environment, others, such as low volatility or dividends, may be more defensive and potentially lead constituents to perform  better in a “risk-off” market.  Some of these defensively oriented indices have demonstrated higher performance in the start the year.

The S&P 500 Low Volatility Index is designed to track the 100 least-volatile stocks within the broader S&P 500 as measured by S&P DJI’s proprietary methodology.  This low-volatility index is rebalanced and reconstituted on a quarterly basis in an effort to regularly provide exposure to less volatile securities.

As of January 31, 2016, financials (27%), consumer staples (22%), industrials (16%), and utilities (12%) were the largest sector weights in the S&P 500; the MSCI USA Minimum Volatility Index, which is tied to a different parent index, has sector bands.  The MSCI USA Minimum Volatility Index’s recent sector weights were financials (22%), health care (20%), information technology (15%), and consumer staples (15%).  [According to iShares.com]

The top 10 holdings for the S&P 500 Low Volatility Index include Campbell Soup (CPB) and Coca-Cola (KO).  In contrast with the S&P 500, exposure to information technology in the S&P 500 Low Volatility Index is limited (at 2.8%), and there are currently no energy holdings.  The S&P 500 Low Volatility Index was down 2.4% year-to-date as of Feb. 3, 2016.

Meanwhile, the S&P 500 Dividend Aristocrats® currently holds 50 constituents from the S&P 500. The methodology for the S&P 500 Dividend Aristocrats requires that its constituents have increased their dividends for the last 25 consecutive years.  The index is rebalanced on a quarterly basis, though companies enter or exit on an annual basis.  Some current constituents, including Hormel Foods (HRL) and Johnson & Johnson (JNJ), have increased dividends for more than 45 consecutive years.

As of January 2016, relative to the S&P 500 Low Volatility Index, the weights of consumer staples (27%) and energy (4%) in the S&P 500 Dividend Aristocrats were higher, while financials (11%) and utilities (2%) were lower.  The S&P 500 Dividend Aristocrats has declined 2.7% year-to–date, as of Feb. 3, 2016.

The methodology for a third subset of the S&P 500 Index, the S&P 500 Low Volatility High Dividend Index, combines two defensive factors.  The index seeks to include the 50 least-volatile, high-dividend-yielding securities in the S&P 500 and is rebalanced on a semiannual basis.  The methodology for the S&P 500 Low Volatility High Dividend Index recognizes companies for their yield, but not the longevity of payments.

As such, it is no surprise that the utilities sector (25% of assets) is overweighted relative to other S&P 500-based sub-indices, while health care (7%) is underweighted.  Financials (19%) and consumer staples (17%) are other heavily-weighted sectors.  HCP Inc. (HCP) and TECO Energy (TE) are two of the current holdings.

The S&P 500 Low Volatility High Dividend Index was up 0.2% year-to-date through Feb. 3, 2016. (note, this is what I pulled on Feb 4 from the SPDJI website)

There are ETFs available that track these factor-based indices.  S&P IQ Global Markets Intelligence Group provides research and rankings on approximately 1,100 ETFs on a daily basis.  To learn more, visit http://trymsatoday.com/ or follow me on Twitter @ToddSPGlobal.

My colleague, Sam Stovall, U.S. Equity Strategist for S&P IQ Global Markets Intelligence Group, will be speaking at an S&P Dow Jones Indices event titled “Where Can Smart Beta Take You?” on Feb. 24, 2016.  You can register for the live streaming or in-person event.

S&P IQ Global Markets Intelligence Group operates independently from S&P Dow Jones Indices.

All information as of [February 4]

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S&P Capital IQ operates independently from S&P Dow Jones Indices.
The views and opinions of any contributor not an employee of S&P Dow Jones Indices are his/her own and do not necessarily represent the views or opinions of S&P Dow Jones Indices or any of its affiliates.  Information from third party contributors is presented as provided and has not been edited.  S&P Dow Jones Indices LLC and its affiliates make no representations or warranties of any kind, express or implied, regarding the completeness, accuracy, reliability, suitability or availability of such information, including any products and services described herein, for any purpose.

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

Does it Have to Be Active OR Passive? Why Not the Best of Both Worlds?

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Koel Ghosh

Head of South Asia

S&P Dow Jones Indices

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The debate on active versus passive investing is endless, and there are strong arguments on both sides. The active side argues on the advantages of alpha, star fund managers’ year-over-year record performances, better market timing, and better stock picking backed by thorough research.

On the other side, there is a strong passive argument for capturing market beta at significantly lower costs due to lower investment management fees, as passive investing does not require fund manager expertise or expensive research costs. Further contesting the benefits of active management, passive investing has the argument that a fund manager’s consistent performance can be debated and that the continuity of the fund manager’s association with an investment plan or fund is not guaranteed.

Passive, or index-based, investing is investing in products linked to underlying indices. Indices have transparent methodologies, thereby providing rules that ensure that the key criteria to good representation are captured. The index can be a plain vanilla market benchmark like the S&P BSE SENSEX or a broader index, like the S&P BSE LargeMidCap, the S&P BSE 100, etc. The variety of indices is exhaustive, cutting across sectors, geographies, strategies, themes, and factors. Factor-based, or smart beta indices have increased in popularity in recent years. But what, exactly, do smart beta indices do? They capture factors which vary between fundamental and other risk factors to formulate rules that provide variable performance (see Smart Beta on the Rise in India).

Passive investing also offers the advantage of diversification. The comparison of a select few indices effectively demonstrates the advantages of diversification, which can be achieved via exposure to different broad and factor indices (see Exhibit 1).

Exhibit 1: Index Returns 

Index ReturnsSource: Asia Index Private Limited. Data from Jan. 31, 2006, to Feb. 1, 2016. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. 

Annualized Index ReturnsSource: Asia Index Private Limited. Data as of Jan. 29, 2016. Table is provided for illustrative purposes and reflects hypothetical historical performance. TR refers to Total Return and includes dividends. 

However, why not get the best of both worlds?

Portfolio managers employ various asset allocation strategies that span styles like conservative, moderate, aggressive, or alternatively strategic or tactical allocations. A familiar strategy often spoken about is core-satellite investing, which is a hybrid of both strategic and tactical allocation. The main objective of investors or portfolio managers is to adopt a strategy that will ensure they achieve their specific goals. If this entails using two strategies and they achieve the same goal, so be it! The core-satellite approach is used to combine active strategies with passive. Hence, those who favor passive investing can use that as their core strategy through index funds and ETFs, and they can support it with active management, and vice versa, to potentially meet their goals and thereby use both active and passive styles to their benefit.

Exhibit 3: Core-Satellite Investment Strategy 

Index ETFSource: S&P Dow Jones Indices LLC. Charts are provided for illustrative purposes. 

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

Homes In These Two Cities May Shelter Better Than Gold

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Gold is on the rise this year as investors seek shelter from the volatility in the stock and oil markets. While 90-day annualized volatility of oil, around 50%, is the highest since April last year, and is near its 2001 peak, it’s not near the high levels of 2008 or 1991. Also, the open interest that usually collapses near peak volatility and oil bottoms continues to be high.

Source: S&P Dow Jones Indices. Bloomberg.
Source: S&P Dow Jones Indices. Bloomberg.

This may indicate there will be further trouble in the oil market so is bad news. It’s not only bad news for oil but as commodities and stocks have become more correlated, the fear is spreading across all risky assets. Many times when this happens, investors turn to gold, as they are now. Just as stocks and commodities are each on the brink of a 10% loss year-to-date, gold is up 13% in 2016.

Source: S&P Dow Jones Indices.
Source: S&P Dow Jones Indices.

Given the near zero correlation of gold to the S&P 500, it makes sense to use gold for diversification, but given its near 30% loss in 2013, viewing it as a safe haven is arguable. However, when the S&P 500 loses more than 10% over 12 months, gold has returned positive 62% of the time with an average of 2.7%.

Another asset class with near zero correlation to stocks is real estate. In particular, the S&P/Case-Shiller 20-City Composite Home Price Index that measures the value of residential real estate in 20 major cities in the U.S., has 0.08 correlation to the S&P 500 using monthly data since Jan. 2000.

So, can your home price protect as well as gold in a stock market crash?

It depends where you live, but seven of the twenty cities gain on average during stock declines bigger than 10%. The cities include Boston, Dallas, Denver, Minneapolis, New York, San Diego and Washington, D.C. The home prices gain on average 6.0% in Boston and 4.7% in New York that far exceed the 2.7% gold offers. Washington D.C. and Denver are close seconds to gold, gaining 2.4% and 2.3% on average when the S&P 500 loses more than 10% in 12 months.

If you are in Las Vegas, you may be better off betting on gold for safety as their local housing market loses 7.4% on average, only behind Phoenix that loses 8.8% on average when stocks lose.

 

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

Volatility Rides Again

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Chris Bennett

Director, Index Investment Strategy

S&P Dow Jones Indices

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Global equity markets stumbled out of the gate in 2016, and still haven’t found their stride. Markets are experiencing an intense case of risk off sentiment, as investors flee from riskier assets in pursuit of safe havens. The yield of 10 year US Treasury Notes is down to less than 1.8%, while oft-maligned gold is coming back into favor. The VIX is also up above 26, which is over 50% higher than it was at the same time last year.

The S&P 500 remains in correction mode, as safety seems to be the name of the game. The Utilities Sector of the S&P 500 has surged in 2016, following a weak 2015. Through Friday’s close, the Utilities sector was up 8% on the year, while the broader S&P 500 was down 8% (both on a total return basis). The Consumer Discretionary sector was the strongest sectoral performer in 2015. Thus far in 2016, it had been one of the weakest, declining 12%.

This is driven in no small part by fears of slowdown in global growth, specifically in China. According to the Wall Street Journal, data out of China over the weekend showed that China’s foreign exchange reserves fell nearly 100 billion USD last month as Beijing defends the value of the Yuan in the face of growing short interests and following a 108 Billion USD decline in December. Granted, China still has over 3 trillion USD in foreign exchange reserves to work with, so this may not be as bad as it seems. Following the unexpected devaluation of the Yuan in August of last year, however, market participants are undoubtedly a little on edge.

It comes as no surprise that low volatility strategies have outperformed in this environment. The S&P 500 Low Volatility High Dividend Index was up nearly 1% through close Friday. Typically these strategies outperform in choppy markets as they decrease downside exposure. In other words, low volatility strategies provide some protection when volatility rides again.

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