Get Indexology® Blog updates via email.

In This List

India's ETF Market: Sustainability and Innovation

Canadian Equities Offer Some Solace amid World Turmoil

The Odds Are Against You

Inflation Is Here. A Multi-Asset Dynamic Hedging Strategy Is Also Here.

Rising Rate Reflections

India's ETF Market: Sustainability and Innovation

Contributor Image
Koel Ghosh

Head of South Asia

S&P Dow Jones Indices

The pandemic, along with its disruption, also opened windows to many opportunities. Innovation and new ideas are the key words. Sustainability is not a new idea; however, its focus has accelerated with the pandemic and incidents triggered by climate change. Nations and organizations are adopting ESG measures and bringing its importance to the forefront. Its incorporation into investment strategies has further emphasized its importance. The assets in sustainable funds have crossed USD 2.7 trillion, with over 5,900 funds.1 Europe dominates both in terms of assets and products, followed by the U.S. S&P DJI has had a long history of providing ESG indexing solutions, with some prominent indices such as the S&P 500 ESG Index, S&P Paris-Aligned & Climate Transition Index Series, and a host of options across core, thematics, factors, and fixed income.

In their quest for innovation, providers of financial strategies are evaluating options like the S&P Kensho Indices, which capture the industries and innovation of the fourth industrial revolution. This new generation of indices, powered by artificial intelligence, is designed to track innovation systematically and is helping market participants adopt a quantifiable framework to understand and measure innovation.

Can Passive Be the new Active?

The strong growth in passive investing is encouraging its prospects. India is seeing a heightened interest and the resultant product issuances. Active outperformance is being challenged by indexing strategies. The road to passive investment styles dominating markets is a long one, but with new milestones, there is optimism to get there.

1 MorningStar, https://www.morningstar.com/lp/global-esg-flows-, Global Sustainable Fund Flows: Q4 2021 in Review

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

Canadian Equities Offer Some Solace amid World Turmoil

Contributor Image
Fei Mei Chan

Director, Core Product Management

S&P Dow Jones Indices

Despite global geopolitical tensions, Canadian equities, in contrast to U.S. equities, seem to be faring well. Since its rebalance on Dec. 17, 2021, the S&P/TSX Composite gained 5.7% (through March 17, 2022). It was no surprise that the S&P/TSX Composite Low Volatility Index lagged—what was surprising was that it lagged by 1.3%, rising 4.4% over the same period. This is a capture of 78% of the upside—significantly higher than the historical upside capture rate of 66%.

Volatility levels remained steady for the most part, with Health Care and Information Technology clocking in the greatest changes, down 6% and up 5%, respectively.

In the latest rebalance for the S&P/TSX Composite Low Volatility Index, effective at the close of trading on March 18, 2022, sector weight changes were minimal. The low volatility index shed what little weight it had in Consumer Discretionary and Information Technology entirely. The slack was mostly picked up by Energy and Real Estate, each adding 2% to its weight. Despite a 6% volatility decline in the sector overall, Health Care’s weight remained steady, pointing to pockets of volatility within the sector.

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

The Odds Are Against You

Contributor Image
Craig Lazzara

Managing Director, Core Product Management

S&P Dow Jones Indices

S&P Dow Jones Indices’ SPIVA (S&P Index Versus Active) scorecard, first published in 2002, has become our industry’s de facto scorekeeper of the relative performance of active managers. We recently released the U.S. SPIVA results for 2021. Nothing in the 2021 report was surprising, as most active managers continued to underperform benchmarks appropriate to their investment style. Some observations, however, are worth highlighting:

  • 2021 was a particularly difficult year, as 80% of all U.S. active managers underperformed the S&P Composite 1500®. In the large-cap segment, 85% of active managers lagged the S&P 500®. This made 2021 the second-worst year for large-cap managers on record (exceeded only by 2014, a year of record-low dispersion).
  • 2021’s results were especially challenging for large-cap growth managers, 99% of whom underperformed the S&P 500 Growth. Growth managers’ difficulties were especially acute because the largest companies in the growth index, which would have been underweighted by most active managers, performed very well.
  • Although mid- and small-cap managers underperformed at lower rates (62% and 71%, respectively) than large-cap managers, their record in 2021 was much worse than in the recent past. A majority of both mid- and small-cap managers had outperformed in three of the four years between 2017 and 2020, when their performance could benefit from an ability to “drift” up the capitalization scale. In 2021, the performances of the S&P 500, S&P MidCap 400®, and S&P SmallCap 600® were much closer than in the prior four years, meaning that the benefit of drift across the cap scale diminished.
  • Active managers often argue that they should be judged not simply by their returns, but also on their ability to manage portfolio risks over long periods of time. We agree—but SPIVA makes clear that, even after adjustment for risk, more than 90% of active managers, across the capitalization spectrum, underperformed over a 20-year horizon.

Despite some idiosyncrasies, the most important thing about 2021’s SPIVA results is what they share with the prior 20 years’ reports. SPIVA data extend to 2001; in 21 years, a majority of large-capitalization active managers outperformed the S&P 500 only three times. In 18 years out of 21, most large-cap managers lagged the benchmark. This is not an accident or a coincidence; active managers underperform for identifiable, robust, and sustainable reasons. Investors considering the use of active management should realize that the odds are against them.

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

Inflation Is Here. A Multi-Asset Dynamic Hedging Strategy Is Also Here.

Contributor Image
Jim Wiederhold

Associate Director, Commodities and Real Assets

S&P Dow Jones Indices

The S&P Multi-Asset Dynamic Inflation Strategy Index was launched in 2021 to offer a more dynamic, rotational approach to integrating inflation hedging than the typical static 5%-10% allocation to commodities. The index dynamically weights asset class constituents monthly based on the underlying inflation regime represented by the latest monthly U.S. Consumer Price Index (CPI) reading.1 In 2022, the index has outperformed most major asset classes, as can be seen in Exhibit 1. With the highest inflation readings in decades, it may make sense for industry participants to look to assets that have performed well in high inflation environments historically.

Why did the S&P Multi-Asset Dynamic Inflation Strategy Index display double-digit positive performance in 2022? The answer lies in the current constituent percentage weights. In a high-inflation environment, it’s possible that inflation-sensitive asset classes with high inflation beta could offer a way to combat high and rising inflation. Exhibit 2 illustrates the weighting of the index over time with the U.S. CPI readings overlaying it. As of Feb. 28, 2022, the index weight was over 50% commodities (in yellow), allowing it to perform well in this environment. Recent inflation readings are some of the highest we’ve seen in the modern era. Based on its back-tested history, the index would’ve spent much of its time in a 60/40 equity/bond weight in the 2010s, as we had many years of low inflation during that time. This allowed it to perform well over time regardless of the inflation regime.

Where do we go from here? With the Fed hiking rates on March 16, 2022, by 25 bps, time will tell if this effort cools prices or not. Geopolitical conflicts and lagging pandemic supply chain issues have been playing major roles in this high inflation backdrop and might continue to be a factor in the future. The Fed believes inflation could be high until the middle of 2022. Some economists are adjusting their inflation forecasts and expecting transitory scenarios to play out over the short term in some areas of the global economy. The ability of the index to adjust to different inflation regimes has historically offered impressive results, albeit during the short two-decade back-tested history. Correlations of changes in the index performance to changes in inflation over the past five years were positive compared with less dynamic market exposures as can be seen in Exhibit 3.

The S&P Multi-Asset Dynamic Inflation Strategy is designed to offer a researched, rules-based benchmark to navigate this high inflation time in a favorable risk-adjusted way. For a deeper dive into the index, check our Fiona Boal and Lalit Ponnala’s paper here.

1 For more detailed information on the objective of the index, read this blog from Fiona Boal.

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

Rising Rate Reflections

Contributor Image
Fei Mei Chan

Director, Core Product Management

S&P Dow Jones Indices

The Federal Open Market Committee voted to raise the Federal Funds rate by 25 bps on March 16, 2022. This move was well telegraphed and not at all surprising—but that doesn’t mean that we won’t hear concerns about how rising rates will impact equity returns. Finance theory teaches us that, other things equal, rising interest rates are not good for the performance of stocks, as rising borrowing costs and higher discount rates tends to translate to lower future performance. For the much of history, empirical evidence has aligned with the theory. But in more recent data, we have noticed that “other things” may not have always been equal.

At a cursory glance, rising rates have not necessarily boded ill for equity performance, at least in the period from 1991 through 2021. There were eight episodes when the 10-Year U.S. Treasury yield rose. The S&P 500® declined in none of these; in two cases equities were flat, and the S&P 500 rose in six, in some instances quite substantially.

Breaking down the period in Exhibit 1, there were 156 months when the 10-Year U.S. Treasury yield rose (and 216 months when it declined). Of the months when the 10-Year U.S. Treasury yield rose, the S&P 500 gained in 115 (74%) and declined in 41; the S&P 500 rose nearly three times as often as it fell when interest rates rose. On average, the S&P 500 gained 1.57% each month that rates rose, versus just 0.55% in months when rates declined.

We can also look at these months graphically in the scatter plot in Exhibit 3. Here we plot the change in the 10-Year U.S. Treasury yield against the performance of the S&P 500 for the same period from 1990 through 2021. Each point represents a monthly observation, and we see no discernible relationship. The blob speaks for itself—or rather, it doesn’t. History does not provide evidence of a clear link between changes in interest rates and changes in the equity market.

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