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In This List

A Look at the Investability and Replicability of the S&P/BMV IPC

Defensive “Buffer Protect” Option Strategies Can Help Investors Stay the Course

Volatile but Not Necessarily Disastrous

The 2nd Worst December Is Only Half The Story

Top 10 Dow Jones Industrial Average Factoids – 2018 in Review

A Look at the Investability and Replicability of the S&P/BMV IPC

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Maria Sanchez

Director, Sustainability Index Product Management, U.S. Equity Indices

S&P Dow Jones Indices

In a prior blog, Getting to Know the S&P/BMV IPC – An Iconic Representation of the Mexican Equity Market, we examined the evolution of the S&P/BMV IPC and tracked its role from being a financial market indicator to serving as the basis for index-linked liquid investment products. In this blog post, we look at the investability criteria incorporated in the index methodology, allowing it to meet the liquidity needs of market participants and index-linked investment products.

The investability of an index is a function of two variables—the liquidity of the underlying constituents and the weight of the securities in the index. For instance, a security with low liquidity should not necessarily have a high weight in the index, all else being equal. Moreover, the investability of an index determines its investment capacity.

Therefore, index design should strive to achieve an investable and replicable index for the target market. With that in mind, we look at the index mechanics of the S&P/BMV IPC and review how the methodology addresses liquidity needs. Some of the most relevant points were:

  • Weighting scheme: In 1999,[1] the S&P/BMV IPC methodology changed from total market-cap weighted to a float-adjusted market-cap weighting scheme. The index also employs additional constraints to reduce concentration risk: no single stock’s weight can exceed 25% and the aggregate weight of the five largest stocks cannot exceed 60%.
  • Minimum float inclusion criteria: The free float factor measures the percentage of company shares available to be traded in a market. The S&P/BMV IPC methodology added this requirement in 2012[2] as inclusion criteria for constituents. To be part of the S&P/BMV IPC, stocks must have an investable weight factor (IWF) of at least 10%.
  • Volume-weighted average price (VWAP) float-adjusted market cap inclusion criteria: To be part of the S&P/BMV IPC, stocks must have a minimum VWAP float-adjusted market cap of MXN 10 billion (MXN 8 billion for current constituents). VWAP float-adjusted market cap is calculated by multiplying the number of shares outstanding by the assigned company’s IWF and by the VWAP over the prior three-month period.
  • Median daily value traded (MDVT) inclusion criteria: to be part of the S&P/BMV IPC, stocks must have a MDVT of at least MXN 50 million (MXN 30 million for current constituents) over the prior three- and six-month periods.
  • Median traded value ratio (MTVR) inclusion criteria: Stocks must have an annualized MTVR of at least 25% over the prior three- and six-month periods.

Do these index mechanics improve the overall liquidity profile of the index? We reviewed the daily trading volume of the S&P/BMV IPC constituents to find out. As of Nov. 30, 2018, the six-month MDVT of the index was around USD 8.80 million on average, compared with that of S&P/BMV IPC CompMx constituents at USD 5.29 million. Hence, the S&P/BMV IPC was nearly 50% more liquid than the broader index.

A quick capacity analysis using the index composition as of Nov. 30, 2018, and the constituents’ six-month MDVT showed that a portfolio of USD 140 million could be completely traded in a single day (assuming 100% of the six-month MDVT). On the other hand, trading the same portfolio size on the broader S&P/BMV IPC CompMx would take double that amount of time.

Currently, the S&P/BMV IPC serves as the underlying benchmark for an ETF with assets of over USD 3 billion.[3] The size of this index-linked product is a testament to the importance of having a liquid and investable underlying benchmark.

[1]   The S&P/BMV IPC Turns 40

[2]   The S&P/BMV IPC Turns 40

[3]   Source: ETFGI. ETFGI is the leading independent research and consultancy firm on trends in the global ETF/ETP ecosystem and is based in London, England. Deborah Fuhr, Managing Partner, co-founder, ETFGI website

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

Defensive “Buffer Protect” Option Strategies Can Help Investors Stay the Course

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Karan Sood

CEO & Managing Director, Head of Product Development


Equities have historically offered promising growth potential, but we have seen time and again how suddenly and severely the equity markets can be affected by events that are difficult to predict, and 2019 is not likely to be an exception. Losses can have a greater impact on portfolios than gains because the money remaining after the loss must work hard to recover just to break even.

Losses can happen more often than expected…


…and it can take years to recover


Traditionally, investors have relied on diversifying equities with bonds, or market timing, to help minimize their risks from losses. But these strategies may be challenged in certain market environments.

60/40 may not be the answer

Many investors maintain a typical 40% allocation to fixed income investments to provide a counterbalance to equities during times of market volatility. However, bonds may decline at the same time as equities, as happened in October 2018, negating the expected counterbalance benefit. Fixed income may also be challenged when interest rates rise and lose purchasing power in an inflationary environment.

Being cautious does not mean being in cash

Investors who sell at the first sign of market downturns and wait on the sidelines in cash for the market to recover can miss out on top-performing days, which can have a big impact on returns. Further, like fixed coupon bonds, cash loses purchasing power in an inflationary environment.

A defensive options strategy can provide protection plus potential growth

An alternative approach that may help protect an investment involves the use of options—instruments that seek to provide a contractual level of certainty that other approaches lack.

A defensive “buffer protection” strategy, utilizing a combination of call and put options overlaid on an exposure to a given index, offers an alternative risk management solution. This type of strategy provides a “buffer” of protection against the first 10% of losses in the chosen index while capturing potential growth to a maximum capped gain (“cap”) over a period of approximately one year.

The cap level is set at the start of the period, such that the 10% downside protection is paid for by giving up potential returns above the cap. The returns of the strategy will be a function of the level of the index at the end of the period relative to its level at the start of the period.

Defensive buffer protection option strategies are typically implemented in structured notes and annuities with a single strategy of one-year maturity. However, the single strategy, one-year maturity creates acute timing risks, locking investors into one specific cap and buffer for an entire year. This prevents investors from capitalizing on new buffer levels or upside caps over the course of the year as the chosen index moves up or down.

The timing risks associated with a single strategy, one-year maturity can be mitigated through the same “laddering” technique used by bond investors. Equity investors seeking persistent defensive protection can build a laddered portfolio of defensive options strategies with maturities ranging from one to 12 months. In this manner, each month a defensive options strategy would mature and be rolled forward for another 12 months. This allows the downside protection and cap levels to reset and stay current to the prevailing market conditions for a portion of the investment, which can be an advantage in a rising or falling market environment.

The Cboe S&P 500 Buffer Protect Index (ticker: SPRO) employs such a strategy, using a laddered portfolio of 12 Buffer Protect Strategies designed to protect the first 10% of losses in the S&P 500 while capturing growth to a maximum capped gain.

[1] Calculated using Bloomberg data as the percentage negative return on a date from the highest level by the S&P Index prior to that date.

[2] Calculated using the formula TimeToRecovery = -Ln(1-OneTimeLoss)/Ln(1+RecoveryRate).

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

Volatile but Not Necessarily Disastrous

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Fei Mei Chan

Former Director, Core Product Management

S&P Dow Jones Indices

In 2018, the S&P 500 declined for the first time in 10 years. The year’s 4% decline is obviously de minimis compared to 2008’s 37% plunge, though investors may feel it more keenly since the fourth quarter’s 14% decline erased what had been a profitable year.  Nonetheless, the risk landscape changed dramatically in 2018 compared to the lethargy of 2017.

We find it helpful to view market volatility through the lens of dispersion and correlation.  The graph below compares annual average dispersion and correlation levels for the past 28 years.  Between 1991 and 2017, there had been only four years in which the index was down; all coincided with very high dispersion.  2018’s relatively modest decline occurred in a different environment – average dispersion for the year ran slightly below its historical median.  The data suggest that while very high dispersion doesn’t guarantee a large decline, large declines have not occurred in the absence of very high dispersion.


In December 2018 alone, the S&P 500 declined 9%, so it’s appropriate to observe that month’s data relative to other periods of market weakness.  The dispersion-correlation map below juxtaposes December 2018 against monthly levels in 2001 and 2008.  Even in December, dispersion lay below its historical median; the month’s surge in volatility was driven by a surge in correlation.  Dispersion would have to rise dramatically to approach the levels we saw in the last two market crashes.

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

The 2nd Worst December Is Only Half The Story

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Jodie Gunzberg

Former Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

The S&P 500 lost 9.2% in its second worst December on record – only behind December 1931 when the index lost 14.5%.  However, the widespread losses across sectors, styles and sizes in the broad U.S. equity market was remarkable with every major segment down in December.  Only 9 times in history has every segment of the U.S. equity market lost in a month (with all sector data starting in 1995 and style data in 1997.)   Those months were Aug. 2015, Sep. 2011, May and Jun. 2010, Jan. and Feb. 2009, Oct. 2008, and Jul. and Sep, 2002.

Source: S&P Dow Jones Indices

Not only was every segment of U.S. equities negative in December but 33 of 42 segments had their worst December ever,  For the 9 other segments, 7 recorded their 2nd worst Decembers and 2 had their 3rd worst Decembers.  Despite the December records, none of the 42 segments of the market posted their worst month ever, but the S&P MidCap 400  lost 11.5%, recording its 4th worst month ever, with the S&P 400 Health Care down 13.6%, S&P 500 Energy -12.8%, S&P 600 Consumer Staples -11.8% and S&P 600 Energy -23.6%, all recording their 3rd worst months ever.

Source: S&P Dow Jones Indices.

As bad as December was, it was only partly responsible for the drawdowns experienced this year.  In fact, in most segments, December’s loss didn’t even account for half the total bloodshed.  Only 12 of 42 segments lost more than half their total drawdown in December: S&P 600 Utilities 63%, S&P 500 Real Estate 62%, S&P 400 Communication Services  62%, S&P 400 Real Estate  57%, S&P 600 Real Estate  57%, S&P 500 Health Care 56%, S&P 600 Communication Services 55%, S&P 600 Consumer Staples 55%, S&P 500 Consumer Staples 55%, S&P 400 Health Care 53%, S&P 600 Health Care 53%, and S&P 600 Financials 52%.  

Source: S&P Dow Jones Indices.

Although health care and utilities declined in December for more than half their total drawdowns, they still held up relatively well for the year.  Overall, health care was the only sector with big enough early gains, especially in small caps to survive the year in positive territory.  The small caps outperforming large caps in health care can be due to deal making, increased expectations for acquisition of smaller companies, stronger innovation from smaller companies and that smaller companies may be more immune to concerns of regulatory pressures in healthcare.

Source: S&P Dow Jones Indices

That said, the S&P SmallCap 600 Health Care index still posted its worst quarter ever, losing 23.1%, due to the slowing growth of health care spending.  The S&P SmallCap 600 Industrials also logged its worst quarter ever, losing 23.5%, mainly due to a slowing economy and trade tensions.  While the S&P 500 Energy had its worst 4th quarter, losing 24.4%, it was not enough to push it into its worst year, but still only lost about half of the smaller companies in the sector.  If oil prices rise, and inflation picks up, small caps may get the benefit of the uptick since they are less hedged than the bigger energy companies.

What’s next for equities is impossible to know for sure, especially when there has only once been a December this bad.  While the year ended down 6.2% for the S&P 500, its worst in a decade, there were 22 years prior with worse returns.  In the Januaries following those 22 years, only 7 were negative, and the average return was 7.1%.  In the 22 years following the years worse than 2018, 9 were negative with an average of 1.0%, and of the 7 negative Januaries, 4 of those years ended negative in 1932, 1941, 1974 and 2002.  On average in all Januaries, small caps have lost 48 basis points while large caps gain 8 basis points and mid caps win gaining 39 basis points, and historically continue to win through the first quarter.

Though the market is hard to time, positioning for the rebound matters, especially by size and sector.  Mid-caps may do well in these first bull-market days since they are generally not as risky as smaller companies, yet have solid infrastructure but are nimble enough to take advantage of opportunities, especially overseas if the dollar drops.  Regardless of size, the financial and real estate sectors have done best on average in the first days of a new bull. Every size of these sectors develop into a bull market in the first 20 days on average after S&P 500 bottoms with large- and mid-cap financials returning nearly 28%. Even in just the first 3 days, the average returns of these segments were between 11.3% and 15.4%.

Is this time the same or different? Most of the time the markets come in cycles but there are some current issues to be focusing on now.  Despite decent consumer spending and manageable debt levels, low unemployment and wage growth and a growing economy – even if slowing, there are broader systematic risks impacting the world like slowing Chinese and European growth, trade tensions, Brexit, slowing housing and rising interest rates,



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

Top 10 Dow Jones Industrial Average Factoids – 2018 in Review

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Jamie Farmer

Former Chief Commercial Officer

S&P Dow Jones Indices

Does this describe 2018?  This perhaps?  What about this?

Let’s be frank: the markets took a bit of a beating this year.  In contrast to the tremendous performance of last year, 2018 was markedly less enjoyable or serene:

  1. At the Close – the DJIA ends an ugly year on a positive note; the last session added over 260 points to finish at 23,327.46 for a daily gain of 1.15% and the best final trading session since 2012. But for the year, the Average closed down 5.63%, the worst annual performance since 2008 and only the second negative yearly return of the last decade.  The DJIA also closed out 2018 down over 13% from the high for the year; similarly, that was the worst since 2008 when the market closed nearly a full third lower (down 32.79% from that year’s high).
  2. Prominent Themes – The return of volatility, the last legs(?) of a decade long bull market, tariffs and trade wars, interest rate increases and unpredictable US and global political climates.
  3. New Highs – the DJIA logged 15 new highs in 2018, behind the pace of the last few years yet ahead of the annual average of 11 new highs per year since inception. In contrast, the DJIA reached more new highs in 2017 – 71 in total – than any year in history.  There have been 53 calendar years when the DJIA notched at least 1 new high and 70 when none were recorded.
  4. Large Moves – Muted volatility was a major theme in 2017. But in 2018?  Yeah…no.  This year, there were 69 trading sessions when the DJIA posted a move of 1% or greater.  That performance is more volatile than historical averages:  since 1940, the annual average is ~49 one percent moves or an experience that typically occurs in about 1 of every 5 trading sessions.  In 2018, the statistic was greater than 1 in every 4 sessions.  By comparison, in 2017 a 1% move occurred in only 1 of every 25 sessions.  Similarly, the DJIA’s realized 21 day volatility ended the year at 28.51, nearly 4 times higher than the reading at the end of 2017.
  5. Best & Worst Days:
    • Best Day in Point & Percent Terms – December 26 (up 1086.24 or 4.98%), when investors, heartened by positive retail numbers, drove the DJIA to its first ever 1000+ point daily gain and the best ever Christmas Eve session.
    • Worst Day in Point & Percent Terms – February 5 (down 4.60% or 1175.21), when, oddly, the charging economy led to inflation concerns and potentially resultant Federal Reserve responses. The DJIA posted its first ever single session 1000+ point decline followed 3 days later by yet another.
  6. Quarterly Gain – the DJIA posted a pretty brutal return of -11.83% in Q4, the worst period since Q3 of 2011 when the European debt crisis weighed on investor sentiment and pushed the DJIA down 12.09%.
  7. 10 Year Returns – since inception, the DJIA has an average 10 year return of over 83%. This year, despite the negative performance, the 10 year return is a whopping 165%.  How is that possible?  It’s because this most recent 10 year period began after the DJIA got smoked during the financial crisis:  since then, the DJIA has risen from ~8,800 to over 23,000.
  8. Milestones – Two new 1000 point milestones were logged in January (25k and 26k) but the party ended shortly thereafter. This, in contrast to 2017 when 5 new 1000 point milestones (20k, 21k, 22k, 23k & 24k) were recorded.  That performance was the most active such period on record. Remember the caveat:  it’s important to note that as the DJIA gains in value each successive 1000 point milestone represents a smaller percentage gain.
  9. Stock Contributions – UnitedHealth Group (UNH) was the biggest contributor to the DJIA’s advance, adding over 197 points. Boeing (BA) and Merck (MRK) were in the #2 and #3 spots respectively.  Goldman Sachs (GS) was the worst performer in 2018, responsible for bleeding nearly 600 points from the DJIA; 3M (MMM) and IBM (IBM, duh) were the second and third worst performers.   In all, fourteen stocks added to the DJIA over the last year while seventeen detracted. Yes, 14+17=31, more than the DJIA’s requisite 30 blue chip names.  But remember that General Electric (GE), the last remaining original DJIA component, was replaced by Walgreen Boots in June – we need to include GE’s performance (a detraction, by the way) to fully account for the movement of the Average.
  10. Sector Contributions – the Healthcare sector was the largest contributor in 2018, followed by Telecommunications and Consumer Discretionary. In fact, those were the only 3 sectors to make positive contributions.  To the downside, Financials were the worst performer, followed by Industrials and Energy.

Here’s hoping for a better 2019.

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