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Explaining Equal-Weight Indices

Performance of Indian Capital Markets in 2017

S&P 500 Companies Issued USD 775 Billion of Bonds in 2017

Is the Needle Moving on Sustainable Business?

Rieger Report: Municipal Bond ETFs - 10 Years of Growth

Explaining Equal-Weight Indices

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Hamish Preston

Associate Director, U.S. Equity Indices

S&P Dow Jones Indices

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Our recent paper explores the characteristics and applications of equal-weight indices from various standpoints. Since a number of equal-weight indices have outperformed their corresponding cap-weighted parents over the past 15 years, one of the most interesting perspectives asks if factors can help to explain the excess returns of equal weight.  Which factors are most relevant? And just how important are they in explaining the returns to equal-weight indices?

Exhibit 1: Annual Outperformance of Equal-Weight Indices

Source: Outperformance in Equal-Weight Indices. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Small Size matters, and so does (anti-) Momentum

The most obvious candidate for explaining the performance of equal weight is size. In comparison to cap-weighted indices, equal-weight indices are much less concentrated in the largest constituents and have much greater exposure to smaller stocks. Exhibit 2 shows that whereas the largest 10% of stocks (by market cap) accounted for nearly 50% of the total weight in the S&P 500®, the same stocks accounted for only 10% of the weight in the S&P 500 Equal Weight Index. Conversely, the smallest 40% of stocks accounted for just one tenth of the total weight in the S&P 500, compared to 40% in its equal-weight counterpart.

Exhibit 2: Comparing Constituent Sizes and Cumulative Weights.

Source: Outperformance in Equal-Weight Indices. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Another clear choice is momentum. An equal-weight index rebalances by selling relative winners and purchasing relative losers. This is opposite to what a momentum strategy does, and so it is unsurprising that equal-weight indices have generally performed relatively better when their corresponding momentum index has fared relatively poorly, and vice-versa.

Regression Analysis

In order to see how much of the variation in equal-weight indices’ excess returns is accounted for by these two factors, it is possible to run a simple linear regression. Focusing on the S&P 500 Equal Weight Index, we calculated 12-month excess returns each month between September 1995 and December 2017. Doing the same for the S&P 400 MidCap® and the S&P 500 Momentum Index gives the excess returns of our proxies for the size and momentum factors, respectively.

Exhibit 3 summarizes a regression of excess returns to the equal-weight index on the excess returns to the factor proxies. We can clearly see that the signs of the size and momentum coefficients match what we would expect; there is a positive size loading and a negative momentum loading.

Exhibit 3: Regression statistics

Source: S&P Dow Jones Indices. Data from Sep. 1995 to Dec. 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

Using these regression coefficients to derive a predicted 12-month excess returns in the equal-weight index, Exhibit 4 shows that the size and anti-momentum effects captured the majority of the observed variation in S&P 500 Equal Weight performance; there is an R-squared of 0.88.

Exhibit 4: Comparing relative performances of the S&P 500 Equal Weight Index

Source: S&P Dow Jones Indices. Data from Sep. 1995 to Dec. 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

Of course, this factor analysis is not the only way to explain the characteristics and applications of equal-weight indices – as our paper shows, sector and constituent level approaches are also useful. However, market participants would be well-served to account for size and momentum when assessing the performance of equal-weight indices. Such analysis helps to explain why the S&P 500 Equal Weight Index underperformed the S&P 500 in 2017, when momentum was the best-performing S&P 500 factor strategy, and smaller size exposure proved a hindrance.

 

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

Performance of Indian Capital Markets in 2017

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Ved Malla

Associate Director, Client Coverage

S&P Dow Jones Indices

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Capital markets in India had a bull run in 2017 and gave exponential returns across size, segments, and sectors. In this blog, we will analyze how capital markets in India have performed in 2017.

Exhibit 1 and 2 showcase returns for India’s four leading size indices in 2017. 

Exhibit 1: One-Year Absolute Returns of Size Indices
INDEX INDEX VALUE ON DEC. 31, 2016 INDEX VALUE ON DEC. 31, 2017 ONE-YEAR ABSOLUTE RETURN (%)
S&P BSE SENSEX 37,472 48,550 29.56
S&P BSE Large Cap 3,707 4,877 31.55
S&P BSE Mid Cap 13,938 20,893 49.90
S&P BSE Small Cap 13,936 22,408 60.80

Source: S&P Dow Jones Indices LLC. Data from Dec. 31, 2016, to Dec. 31, 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

Exhibit 2: Index Total Returns

Source: S&P Dow Jones Indices LLC. Data from Dec. 31, 2016, to Dec. 31, 2017. Index performance based on total return in INR. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

From Exhibits 1 and 2, we can see that all four indices performed well, and returns have been promising for large-, mid-, and small-cap segments. The returns of the small- and mid-cap segments have been better than the large-cap segment. The S&P BSE SmallCap and S&P BSE MidCap posted one-year absolute returns of 60.80% and 49.90%, respectively, while the S&P BSE LargeCap and S&P BSE SENSEX returned 31.55% and 29.56%, respectively.

Exhibits 3 and 4 showcase returns for the 11 leading sector indices for India in 2017. 

Exhibit 3: One-Year Absolute Returns in Sector Indices
INDEX INDEX VALUE ON DEC. 31, 2016 INDEX VALUE ON DEC. 31, 2017 ONE-YEAR ABSOLUTE RETURN (%)
S&P BSE Realty 1,357 2,813 107.24
S&P BSE Basic Materials 2,722 4,298 57.90
S&P BSE Consumer Discretionary 3,286 5,116 55.66
S&P BSE Telecom 1,175 1,775 51.10
S&P BSE Finance 4,781 6,892 44.15
S&P BSE Energy 3,671 5,272 43.62
S&P BSE Industrials 3,174 4,419 39.24
S&P BSE Fast Moving Consumer Goods 9,967 13,283 33.26
S&P BSE Utilities 2,111 2,796 32.48
S&P BSE Information Technology 12,233 13,859 13.29
S&P BSE Healthcare 16,131 16,309 1.10

Source: S&P Dow Jones Indices LLC. Data from Dec. 31, 2016, to Dec. 31, 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes.

Exhibit 4: Index Total Returns 

Source: S&P Dow Jones Indices LLC. Data from Dec. 31, 2016, to Dec. 31, 2017. Index performance based on total return in INR.  Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

From Exhibits 3 and 4, we can see that most of the sector indices have posted promising returns. The S&P BSE Realty had the best return in 2017, with 107.24%, followed by the S&P BSE Basic Materials, S&P BSE Consumer Discretionary, and S&P BSE Telecom, which had one-year absolute returns of 57.90%, 55.66%, and 51.10%, respectively. The S&P BSE Information Technology and S&P BSE Healthcare were the worst-performing indices in 2017, with absolute returns of 13.29% and 1.10%, respectively.

To summarize, we can say that the bulls had their way in 2017, and indices across various size, segments, and sectors have given exponential returns.

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

S&P 500 Companies Issued USD 775 Billion of Bonds in 2017

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Jason Giordano

Director, Fixed Income, Product Management

S&P Dow Jones Indices

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2017 was the sixth consecutive year of record U.S. corporate bond issuances, as companies continued to take advantage of the accommodative environment created by low interest rates and strong investor demand. As measured by the S&P 500® Bond Index, 325 companies came to market for a total of over USD 775 billion in 2017.

Approximately 65% of issuances were refinancings, with corporations looking to lock in lower interest rates and extend maturities. Of the nearly USD 800 billion of bonds to enter the index in 2017, 20% of issues were 30-year term deals, lifting the weighted average maturity of the index close to its 2015 peak (see Exhibit 1). The remaining USD 270 billion of net new issuance propelled the market value of the S&P 500 Bond Index to over USD 4.5 trillion by the end of 2017—an increase of 2.0 trillion since 2011 (see Exhibit 1).

As expected, financial corporations were the top issuers in 2017; companies in the information technology and consumer discretionary sectors filled out the top three. Combined, companies from these three sectors accounted for more than 50% of all debt issuances to enter the index in the year. Issuers from all 11 GICS® sectors were represented (see Exhibit 2).

The 10 largest non-financial issuers accounted for over USD 180 billion of activity in 2017. Activity related to mergers and acquisitions was a predominant driver of bond issuance, as 6 of the top 10 issuers were involved in some form of M&A in 2017. Share buybacks and dividends were also a popular use of proceeds. Both Apple and Microsoft issued bonds to help fund their expanded share repurchase programs (see Exhibit 3).

For more information on the S&P 500 Bond Index, please visit https://spindices.com/indices/fixed-income/sp-500-bond-index.

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

Is the Needle Moving on Sustainable Business?

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Dr. Richard Mattison

Chief Executive Officer

Trucost, a part of S&P Global

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2018 is set to be a major year for sustainable business. The new year is a time to take stock of where we are going—and we are grateful for the opportunity to dig deep into our data to answer the question: “Is the needle moving on sustainable business?”

Each year in the State of Green Business Report, we assess more than 30 indicators of corporate sustainability performance across the world’s top companies.

First, the good news.

  • The carbon emissions of the world’s largest businesses continue to decrease in absolute terms, reaching the lowest level in the past five years as a result of a switch to cleaner fuels.
  • There have been some global improvements in water use and waste management.
  • The number of companies setting carbon and water reduction targets has increased by about 10% over the past five years.

However, the carbon reduction targets set by the 1,200 largest global companies and 500 largest U.S. companies fall short of the contribution needed to align with the 2°C target to limit global warming in the Paris Agreement.

Given that top global companies account for 10% of total emissions, Trucost calculates that the proportional reductions these companies need to make by 2050 and 2100 to align with the 2°C target are 3 and 5 metric gigatons of carbon dioxide equivalent, respectively. U.S. companies, which account for 4% of total emissions, would need to make proportional reductions of 1.2 GtCO2e by 2050 and 1.9 GtCO2e by 2100 in order to align with the 2°C goal (see Exhibit 1).

Yet the carbon targets set by top global and U.S. companies (0.7 and 0.2 GtCO2e, respectively) account for only 22% and 20% of their share of reduction needed by 2050, respectively. The targets currently in place are even smaller compared with the reduction needed by 2100, accounting for 13% and 12% by global and U.S. companies, respectively.

What’s Going to Change?

Carbon prices will need to reach USD 120 per metric ton by 2030 to achieve the Paris Agreement goal, according to modeling using the Trucost Corporate Carbon Pricing Tool. During this transition period, companies will need to understand how the intricacies of diverse carbon pricing policies could affect their operations, revenues, and supply chains—making use of forward-looking data and analytical tools capable of assessing carbon pricing risk under a variety of scenarios in different sectors and regions. The use of such tools by businesses is being encouraged by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

Research by Trucost shows the potential impact of increasing carbon prices on companies. It found that 30% of profits in the automobile sector could be at risk by 2050, while the chemicals sector could have 60% of its profits at risk. The power sector could have its profits wiped out completely.

Many market participants we speak to agree that understanding carbon pricing risk is the key to unlocking more ambitious carbon reduction initiatives and greater investment. Scenario analysis can be used to make the case for setting ambitious carbon targets that are aligned with climate science. Investors want to understand how companies are using carbon pricing scenarios to mitigate risk and direct capital to innovations that will succeed in the transition to a low-carbon economy.

So yes, the needle is moving—and it’s time to get ahead of it.

Find out more in The State of Green Business 2018.

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

Rieger Report: Municipal Bond ETFs - 10 Years of Growth

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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The first Exchange Traded Funds (ETFs) tracking municipal bonds were launched in September 2007. Since then the municipal ETF market has grown to 40 ETFs representing over $30.5billion in assets under management.

Municipal Bond ETF Market Snap Shot:

  • 40 ETFs all but one represents tax-exempt municipal bonds. There is one ETF tracking taxable municipal bonds.
  • $30.5billion in ETF assets (4.4% of total ETF and mutual fund assets)
  • 8 ETFs have assets over $1billion
  • 16 ETFs have assets between $100million and $1billion
  • 16 ETFs have assets of less than $100million
  • 29 ETFs are passively managed (representing over 99% of assets)
  • 11 ETFs are actively managed (representing less than 1% of municipal ETF assets)

Chart 1: Municipal ETF and Mutual Fund Assets:

Chart 2: Number of Municipal ETFs and Accumulated Assets:

Chart 3: Active & Passive Municipal Bond ETFs:

For more information on the municipal bond market performance please go to our website www.spindices.coom

Please also join me on LinkedIn: www.linkedin.com/in/james-j-r-rieger-9324558

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