Investment Themes

Sign up to receive Indexology® Blog email updates

In This List

The Red Zone

Passive Investing – Myth or Reality? Part 1

S&P GSCI Rebalance Triggers Brent Outflows 8X Bigger Than For WTI

The Source of Uncertainty

Dow Jones Industrial Average® 2016 Year in Review

The Red Zone

Contributor Image
Jamie Farmer

Chief Commercial Officer

S&P Dow Jones Indices

two

In grid-iron football, The Red Zone refers to the area between the 25 yard line and the goal line, the last remaining ground the offense must battle through in order to score a touchdown.  This is a somewhat apt metaphor for what we’re currently witnessing with the Dow Jones Industrial Average.

Unless you’ve been living under a rock these last few weeks, you are no doubt aware that The Dow has been closing in on, yet remaining tantalizingly short of, the 20,000 level.  Coming as close as a mere .37 points during the Friday, January 6 session, as of this writing the DJIA has yet to record its first close past this vaunted milestone.

Investors and the market commentariat have been teased with the event for days, but the 20k level has thus far remained resistant to breach.  More specifically, it’s the last 100 points – the distance from 19,900 to 20,000 – that has proven to be such stubborn ground to cover.  Why?  Even if I could, I won’t answer that here – better-informed market participants can speak into that analysis.  But I can say that the DJIA’s current Red Zone campaign just became the most protracted of recent major milestones.

Listed in the table below is the number of trading days it took the DJIA to move through that last 100 points leading up to round, 1,000 point increments.  As of today’s close, which was again found wanting, we find ourselves 19 days into this journey.  Thus, even if we hit our target tomorrow, it will have taken the DJIA 20 sessions to cover the last 100 points – longer than the ten 1,000 point campaigns that preceded it.  On average, it has taken less than 7 trading sessions to cover that distance during recent memory.

How much longer?  As William Faulkner said, “And sure enough even waiting will end…if you can just wait long enough.”  A quote from Vince Lombardi might be more appropriate here but, hey, this was the best I could find.

capture

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

Passive Investing – Myth or Reality? Part 1

Contributor Image
Koel Ghosh

Head of South Asia

S&P Dow Jones Indices

two

Indexing is certainly not a myth, and while active investing is a popular reality in Indian markets, we are seeing the slow and steady rise of indexed products.  In a recent article, John C. Bogle, the founder of Vanguard Group, said, “We are in the middle of a revolution led by indexing.”[1]  John C. Bogle’s first index fund was launched in 1976, and Vanguard is among today’s top global ETF providers.

Revolution indeed; when we see the global ETF assets at over USD 3 trillion, there is no doubt that this space has seen exponential growth.  However, there is no argument against the fact that active management can be successful.  Advocates of active management argue the ability to outperform benchmarks is what supports their claim on the supremacy of the active play.

However, the question is not whether active management is successful, but rather for how long it is persistently successful.  So first, let’s review the outperformance of benchmarks.  This brings us to review whether the appropriate benchmark is being followed.  “Appropriate” is an important qualifier—among other things, it means that the benchmark should be consistent with the manager’s portfolio selection style.  To explain this further, a thematic investment portfolio (e.g., for a dividend fund) should ideally be compared to a dividend index rather than a generic market benchmark like the S&P BSE SENSEX or the S&P BSE 200.  This ensures that there is an apples-to-apples comparison.  This also ensures that market participants are comparing similar universes; hence the “appropriate” comparison.

In the passive world, since the market participants own a proportionate slice of the index, they are earning the index returns less fees and expenses.  In other words, the investment and its objective are aligned directly with the index.  There should be no subjectivity or doubt as to how the index and its benchmark are aligned.

Hence, the first step to ensure that we are measuring active performance appropriately is to check if the investment strategy or product is appropriately benchmarked.  That then provides us with the “real” picture.

[1]   ET, Bloomberg, Nov. 25, 2016.

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

S&P GSCI Rebalance Triggers Brent Outflows 8X Bigger Than For WTI

Contributor Image
Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

two

The S&P GSCI annual rebalancing is beginning today to adjust the commodity weights to their 2017 target weights over the next five days.  Energy remains the biggest sector in the index in 2017, targeting 56.2%, despite a significant decrease from its 2016 target weight of 63.1% and ending weight on Jan, 6. 2017 of 62.2%. In fact, it is the lowest target weight for energy since 1999, driving $600 million of energy outflows for every $10 billion tracked.

Source: S&P Dow Jones Indices. Red bars show target weights and blue bars show actual. Note in 2015 and 2016, the market was falling during the rebalance, so the actual weights never reach the target at the end of the rebalance period.
Source: S&P Dow Jones Indices. Red bars show target weights and blue bars show actual weights. Note in 2015 and 2016, the market was falling during the rebalance, so the actual weights never reached the target at the end of the rebalance period.

One way to look at the results is simply by the weight (Reference Percentage Dollar Weight found on page 11 of the methodology) but most traders want to know how much money is moving as a result of the rebalance to the new target weights.  While the table below shows the dollars that will move for every commodity from the rebalance for every $10 billion tracking the S&P GSCI, the biggest shift is away from brent crude with an estimated $313.7 million flowing out by the end of the rebalance.  It is 8 times bigger than the $39.3 million of outflows WTI will experience from the rebalance.  The main reason this is the case is because the volume of brent only increased 8.9% versus the WTI volume increase of 26.9%.  Also, the average contract reference price fell 32.5% from $65.8 to $44.4 for Brent, versus the lesser WTI drop of $59.4 to $42.1 or 29.0%.

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

Note all the sectors will absorb the dollars exiting energy with the biggest inflow of $258 million for every $10 billion tracking the S&P GSCI going to agriculture.

For information on total AUM tracking commodity indices, please view our replay of the S&P Dow Jones 10th Annual Commodities Seminar and specifically watch Keynote Address: Where in Commodities is the Smart Money Flowing?

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

The Source of Uncertainty

Contributor Image
David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

two

In 2017 politics, not economics will be the major source of market uncertainty.  The world’s major economies moved past the financial crisis and Great Recession: unemployment rates are at more acceptable levels and central banks are discussing the end of quantitative easing. Equity markets in the US and the UK made new all-time highs while those in Europe, Japan and Australia are well above their lows.  Yields on ten-year treasuries are rising in the same countries. Inflation remains low and deflation worries have faded away.

Just when investors thought they could look forward to less complicated times, politics re-appeared with Brexit, oil, the new administration in Washington and elections in France and Germany.  Politics is the focus now.  Many investors follow economic calendars for events like the employment report on the first Friday of each month. A political calendar may be useful as well — a few likely events are cited below. By late this year uncertainty won’t be erased but some direction might be visible.

Shortly after the January 20th presidential inauguration we are likely to see proposals and bills appear on Capitol Hill with details on tax cuts and spending increases.  These will be closely watched but will contain little real information for investors until they are close to being enacted.   Every president since Franklin Roosevelt made promises about the first 100 days – and only Roosevelt in 1932 achieved much in his first 100 days. If either tax cuts or infrastructure spending are enacted before Brexit’s article 50 is invoked, it will show unexpected speed.

Brexit came on the scene last June with the British vote to leave the EU. Recent remarks by British Prime Minister Theresa May suggest a “hard Brexit” with very limited migration allowed between the UK and EU and a need for several new trade agreements.  The first step is to invoke Article 50 to start the clock running on two years of negotiations on new rules of engagement between Britain and Europe. Article 50 is promised by the end of March but few expect everything to be settled in two years. For markets, some clarity may be found when both sides explain what they want. As talks drag on there could be periodic swings in the pound and euro against each other and the dollar.

Elections in 2017 in France and Germany will also be closely watched. In France Election Day is April 23rd with a run-off on May 17th.  One question is whether the populist anti-elite pattern seen in Brexit and Donald Trump’s US victory will carry over to France. Any sign of populist or nationalist gains could reverberate through markets in Europe and the US.  The German election in the fall may be a larger test of populism because Angela Merkel will be running for re-election. Germany’s election must be held between August 27th and October 22nd 2017; a September date is likely.

Politics and oil often mix. The recent agreement among OPEC to reduce output, which boosted oil prices over $50 per barrel, was built on political agreements within OPEC and outside with Russia and other producers. The cuts took effect on January 1st and are planned to last for six months.  With the rig count in the US and Canada already creeping up, the oil markets may look different in June.

Just because politics is the source of uncertainty investors shouldn’t forget the fundamentals of earnings, inflation and growth – they’re what matters in the long run.

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

Dow Jones Industrial Average® 2016 Year in Review

Contributor Image
Jamie Farmer

Chief Commercial Officer

S&P Dow Jones Indices

two

The Dow Jones Industrial Average ended 2016 at 19,762.60 – up 2.337.57 points for a 13.42% annual return, the best year since 2013 when the market surged over 26%.

  • Biggest Themes – markets were driven by the crash (and partial recovery) in oil prices, Fed-watching, China, Brexit and questions regarding the US economy. Oh yeah, there was a Presidential Election too – it was so under-reported I almost forgot to mention it.
  • Leader & Laggard – Goldman Sachs (GS) contributed the most to the DJIA’s advance during the year; Nike (NKE) was the biggest detractor.
  • Sector Performance – Financials were the best performing sector during 2016; the Consumer Discretionary sector posted the worst performance.
  • Best Day YTD (In Points & Percent) – January 29th, an otherwise bright spot in a rather tough month.
  • Worst Day YTD (In Points & Percent) – June 24th, when the UK votes for Brexit.
  • New Highs – the DJIA posted 26 new highs in 2016, including two separate streaks of 7 straight records in July and December.

capture

Download the full report

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