The Transportation industry group1 provides transportation infrastructure as well as services to move people or goods. To track the industry group’s performance, S&P Dow Jones Indices offers the S&P Transportation Select Industry Index, S&P Transportation Select Industry FMC Index, and the Dow Jones Transportation Average. To address potential weight concentration issues in the FMC-weighted index, S&P Transportation Select Industry FMC Capped Index was launched on April 26, 2021. In this blog, we introduce this new index.
Exhibit 1 shows the methodology comparison of the S&P Transportation Select Industry FMC Capped Index, S&P Transportation Select Industry Index, and Dow Jones Transportation Average.
The S&P Transportation Select Industry FMC Capped Index includes all the sub-industries of the Transportation industry group—Air Freight & Logistics, Airlines, Airport Services, Highways & Rail Tracks, Marine, Marine Ports & Services, Railroads, and Trucking—in the S&P Total Market Index universe.
Size and Liquidity Criteria
The eligible stocks need to meet the float-adjusted market capitalization (FMC) and float-adjusted liquidity ratio (FALR) requirements, as shown in Exhibit 1.
FMC Weighted with Capping
The S&P Transportation Select Industry FMC Capped Index is float-adjusted market cap weighted, subject to 4.5/22.5/45 capping at rebalance dates. That is, an individual constituent weight is capped at 22.5% and the aggregate weight of constituents that individually have a weight greater than 4.5% is capped at 45%. The purpose of capping is to reduce weight concentration in any single security and top holdings.
Exhibit 2 shows the weights at rebalance dates for S&P Transportation Select Industry FMC Capped Index and the corresponding FMC weights if there is no capping applied. The exhibit shows that the capping scheme reduced the concentration of the FMC weight historically.
Large Investable Capacity
The FMC capped index offers large investable capacity. Our analysis shows that even with a hypothetical fund size of USD 20 billion, all constituent holdings would still be below 5% of their corresponding FMC (see Exhibit 3).
Exhibit 4 illustrates the return/risk performance of the S&P Transportation Select Industry FMC Capped Index, the S&P Transportation Select Industry Index, and the Dow Jones Transportation Average Index. The FMC capped index outperformed the other two indices in terms of absolute return and risk3-adjusted return during all other periods except the most recent one-year period.
The S&P Transportation Select FMC Capped Index is designed to track the performance of the transportation industry group and aims to reduce weight concentration issues by applying 22.5/4.5/45 capping. Our analysis shows that this index has a large investable capacity. Moreover, the index has comparable performance with other transportation indices such as the S&P Transportation Select Industry Index and the Dow Jones Transportation Average.
1 The GICS® classification standard is used to classify a company by its principal business activity. Each company is assigned to a sub-industry, an industry, an industry group, and a sector.
2 FALR is defined as dollar value traded over the previous 12 months divided by the FMC as of the rebalancing reference date.
3 Risk is calculated as annualized standard deviation of monthly total returns.The posts on this blog are opinions, not advice. Please read our Disclaimers.