Indexology^® Blog

Introduced in April 2017, the S&P/TSX Capped REIT Income Index is designed to serve as an income-producing Canadian REIT strategy by overweighting REITs with higher risk-adjusted income distribution yields. The Canadian REIT sector experienced a boom prior to the onset of the pandemic as the index peaked¹ on Feb. 20, 2020, its then-highest value since its inception. The index gained 86.67%² since its bottom on March 23, 2020, attaining an all-time high on Sept. 8, 2021. In this post, we will take a closer look at the performance characteristics of the index since our last review.

Exhibit 1 shows that the S&P/TSX Capped REIT Income Index generated higher total returns than its benchmark, the S&P/TSX Composite, over the period studied. However, due to higher volatility, its performance was similar on a risk-adjusted basis. Historically, the S&P/TSX Capped REIT Income Index exhibited higher best monthly returns, average monthly returns, and maximum rolling 12-month returns compared with the benchmark.

Exhibit 2 shows that the index outperformed the benchmark 75% of the time in down markets³ and underperformed the benchmark 55% of the time in up markets. However, the magnitude of outperformance in down markets was pronounced, generating a monthly average excess return of 1.29% over the benchmark. Thus the strategy exhibited downside protection characteristics despite experiencing greater volatility.

Exhibit 3 shows the calendar year performance of the S&P/TSX Capped REIT Income Index versus the benchmark. We can see that the strategy outperformed the underlying broad market in 10 out of 16 years.

Higher Yield Than the Broad Market

From December 2006 to September 2021, the S&P/TSX Capped REIT Income Index generated an average historical dividend yield of 6.1%, compared with 2.8% for the benchmark.

Current Composition

As of close of Sept. 30, 2021, the index had 19 constituents, and the maximum weight of any security was 10.6%. Retail REITs topped the list at 33% of the index, followed by Residential REITs at 26% (see Exhibit 6).

Conclusion

Canadian REITs were particularly hard hit during the pandemic, but have recovered steadily, recently reaching a new high on Sept. 8, 2021. The index offers a differentiated high yield REIT exposure in a low yield environment, while also providing exposure to the growth of the REIT sector. Over the long term, REITs have outperformed the broader equity market in Canada on an absolute basis, while providing downside protection during down markets.

¹ Index values measured on a TR basis.

² From March 23, 2020, to Sept. 30, 2021.

³ Down market: When S&P TSX Composite index has negative monthly return. Up market: When S&P TSX Composite index has positive monthly return

In a blog post from earlier this year, I outlined comparisons between Bitcoin and gold. In this post, we’ll look at how the underlying investment theses for each asset have rapidly evolved this year. Prior to 2021, some market participants viewed Bitcoin as a form of digital gold, sharing many of the same use cases, such as being a store of value. Others viewed Bitcoin as a mechanism for exchange or a technological platform. Today, cryptocurrencies have crossed the chasm into the mainstream investment universe and are starting to compete with gold and other asset classes for a slice of the investment portfolio. Correlation turned negative this year as cryptocurrency volatility exploded while gold eased.

During the recent multi-month period of price consolidation for the largest market cap cryptocurrencies, the store of value thesis for holding cryptocurrencies seemed to be gaining prominence. Gary Gensler, the SEC chairman, said, “Bitcoin…is a highly speculative asset, but it is a store of value that people wish to invest in as some would invest in gold.”¹ Institutional adoption continues at pace, albeit within a difficult regulatory environment, adding to the stable demand story needed in order for an asset to be considered a reliable store of value. Transparency increased in 2021 as S&P DJI launched its first cryptocurrency indices.

Concerns about inflation eroding purchasing power have led market participants toward liquid, scarce assets, which tend to hold value over time. Recent performance shows cryptocurrencies performed stronger than all other commonly considered stores of value, albeit with much higher volatility. Volatility may still be high for cryptocurrencies as they adjust to the competing forces of potential regulation news from governments and continued widespread adoption.

Recent debt ceiling discussions in the U.S. opened up the possibility, however small, of default by the country with the widely accepted risk-free rate of return (i.e., U.S. treasury yield). A decade of quantitative easing has arguably devalued assets, including the U.S. dollar. Where can market participants park wealth that won’t lose value over time? Gold, real estate, inflation-protected securities, or alternative assets such as art were the typical answers, but as people become more and more educated on cryptocurrencies, it seems reasonable to assume that they will join the list of assets used as a store of value. According to Fidelity’s latest Institutional Investor Digital Assets Study,² 52% of investors surveyed globally between December 2020 and April 2021 have an investment in digital assets. Asian investors were the most accepting of digital assets, with more than 70% holding exposure.

Alternative investments are becoming increasingly popular as investors look outside the traditional equity and fixed income markets for assets that can provide a good store of value as well as diversification benefits. Inflated asset and real estate prices are driving a closer examination of places to store wealth that will hold value over time. Cryptocurrencies may be viewed as the higher beta store of value as this new asset class coalesces and it could one day be considered a normal allocation to a standard portfolio, similar to gold.

¹ Gary Gensler U.S. SEC Chairman, Oct. 6 2021, House Financial Services Committee oversight hearing.

² Fidelity Digital Assets, September 2021, The Institutional Investor Digital Assets Study.

How are investors using the S&P 500 and DJIA to measure and assess potential opportunities in U.S. equities? Garrett Glawe and Jason Ye of S&P DJI join Michele Barlow of State Street Global Advisors to explore how investors are putting these index icons to work in Asia.

Learn more: https://www.spglobal.com/spdji/en/education/article/comparing-iconic-indices-the-sp-500-and-djia/

How could a dynamic approach to index design help market participants address negative roll yields and volatility concerns? S&P DJI’s Jim Wiederhold and Kelsey Stokes join BlackRock’s Chris Milliken for a closer look at the S&P GSCI Dynamic Roll.

In our two previous blogs on risk parity 2.0 (see here and here), we covered the philosophy and methodological differences between the original S&P Risk Parity Indices and the newly launched S&P Risk Parity 2.0 Indices. This third and final installment of this series now looks at the performance and attribution statistics of the S&P Risk Parity 2.0 Indices, specifically the S&P Risk Parity 2.0 Index – 10% Target Volatility.

As Exhibits 1 and 2 show, the performance of the S&P Risk Parity 2.0 methodology compares favorably to that of the original risk parity indices and significantly outperformed actively managed funds, as measured by the HFR Risk Parity Vol 10 Institutional Index.

The last decade and a half have had no shortage of interesting market events, as the 36-month realized volatility graph in Exhibit 3 underscores. The onset of the Global Financial Crisis in September-October 2008 showed a spike in volatility initially, but then largely flattened out (dropping closer to the “target” as the 36-month window rolls off). Realized volatility stayed in a downtrend for much of the ensuing decade, before once again moving higher during the pandemic.

Drawdown periods and performance were similar across the indices. While the S&P Risk Parity 2.0 Index performed better in Q4 2018 and March 2020 than the other indices, it lagged slightly during the Global Financial Crisis.

As expected, leverage for the S&P Risk Parity 2.0 Index dropped during these periods of volatility. Leverage reached the life-to-date max of 263.9% in November 2007, before falling to the lifetime low of 228.7% in August 2009. After slowly growing over the next decade, it reached a high of 257.5% before the start of the COVID-19 pandemic, and subsequently retreated ~10% over the next few months.

Exhibit 5 shows these leverage drops and the allocated asset class weights over time. The relative commodities and Treasury inflation-protected securities (TIPS) notional allocation have slightly but steadily decreased since inception, with that weight largely being reallocated to fixed income.

Finally, the core of risk parity is neatly displayed in Exhibit 6. While the notional asset allocation is dominated by fixed income, the lower volatility of that asset class translates into a far smaller risk attribution. On the other hand, commodities necessitate a far smaller notional share to satisfy its allocated risk budget. Following the largely downward trend of interest rates globally during this period, fixed income provided the lion’s share of returns, with equities in second place. TIPS, by nature a hybrid instrument that reflects interest rates and inflation/growth expectations, were largely stable across all three metrics.