We previously introduced the S&P 500 Twitter Sentiment Indices and analyzed their performance characteristics. We noted how the indices seek to capture the Tweet-based sentiment premium, with their differentiated performance being driven by differences in index construction and sector weighting. In this blog, we will examine their exposure to standard risk factors and analyze their correlation to other factor indices.
Significant Exposure to the Growth and Quality Factors
We start with a returns-based regression using the five-factor Fama-French model, including momentum as a sixth factor. Exhibit 1 displays the factor loadings, while the complete output of the regression model is shown in Exhibit 2.
Here are some of the key observations.
- A significant negative loading on the value factor indicates that the S&P 500 Twitter Sentiment Indices have had a growth bias.
- Both indices have had a positive loading on quality factors (profitability and investment), well in excess of the benchmark.
- Both indices have exhibited weak and insignificant exposure to the momentum factor, possibly due to the mean reversion that follows highly abnormal social media sentiment.
- For the S&P 500 Twitter Sentiment Select Equal Weight (EW) Index, exposure to small size has been in line with other equal-weight indices.
Variation in Exposure to Momentum and Volatility
Next, we evaluate factor exposures using a holdings-based approach. Following S&P DJI factor definitions, we calculate standardized z-scores for S&P 500 constituents on a monthly basis. Then, we use the constituent weights to evaluate the factor exposure for each index (and the benchmark). As expected, the S&P 500 Twitter Sentiment Select EW Index had the strongest exposure to the sentiment factor (see Exhibit 3). For the remaining factors, the broader S&P 500 Twitter Sentiment Index had a relatively stronger exposure.
Over time, different factors have exhibited different levels of variation in their active exposures (see Exhibit 4). Quality and value exposures appear relatively stable, while momentum and low volatility exposures show a fair amount of variation relative to the benchmark. The active exposure to momentum, in particular, seems to alternate between strongly positive and near zero, supporting the insignificant factor loading seen from the regression analysis (see Exhibit 2).
Active Return Correlations
To round out the characterization of the S&P 500 Twitter Sentiment Indices, we evaluate the correlation between their active returns (relative to the S&P 500) and those of the S&P 500 Factor Indices.
We see that both indices have exhibited low or negative active return correlation to many well-known factors (see Exhibit 5), pointing to potential diversification benefits when targeting multi-factor exposure.
1 Back-tested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance. The back-test calculations are based on the same methodology that was in effect on the index launch date. However, when creating back-tested history for periods of market anomalies or other periods that do not reflect the general current market environment, index methodology rules may be relaxed to capture a large enough universe of securities to simulate the target market the index is designed to measure or strategy the index is designed to capture. The back-test for the S&P Twitter Sentiment Indices is calculated for the period January 2018 to October 2021. S&P Dow Jones Indices designed the sentiment scoring model using data from approximately the same time range. The sentiment scoring model is a natural language processing tool based on linguistic classification of the degree to which a Tweet is likely to be positive or negative. Complete index methodology details are available at www.spdji.com. Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the back-test returns shown.
S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Twitter® is a registered trademark of Twitter, Inc. These marks have been licensed for use by S&P Dow Jones Indices for use with the S&P Twitter Sentiment Index Series. The Indices are meant for informational purposes only and are not recommendations to buy or sell any securities. Any investment entails a risk of loss. Please consult your financial advisor before investing.The posts on this blog are opinions, not advice. Please read our Disclaimers.