U.S.-registered mutual funds with global holdings can more precisely explain artificial tracking error between a benchmark index and fund net asset value (NAV) through use of the S&P Fair Value indices.
1. What are the S&P Fair Value Indices? The S&P Fair Value Indices incorporate adjustments to company share prices based on information available after the close of local exchanges. These fair value adjustments are calculated at the U.S. market close and are then used in the daily calculation of the S&P Fair Value Indices.
2. What are some key benefits of using the indices? U.S. mutual funds that hold foreign securities may have tracking error between benchmark indices and fund valuations, since NAVs include adjustments based on market movement outside of regular local trading hours. The S&P Fair Value Indices offer an explanation of this tracking error by incorporating these market movements into the underlying share prices of the index, and may act as a secondary benchmark for a given fund. As illustrated in Exhibit 1, period returns can vary widely between standard benchmarks and their fair value counterpart.
3. How are the fair value adjustments reflected in the indices? The indices are calculated using fair value adjustment factors applied on an individual basis to each stock in the index. The price for each stock is multiplied by the fair value adjustment for that stock to arrive at a fair value price measured as of the close of trading on the New York Stock Exchange using the 4:00 p.m. EST WM/Reuters exchange rate.
4. What is the source of the fair value adjustment factor? The factors are provided by Virtu Financial, Inc. a pricing service that calculates fair value adjustments. Virtu’s fair value pricing service was previously called ITG Fair Value Model.
5. Are any other changes made to the indices? The index uses the composition effective at the next day’s open (i.e., the adjusted close data). The index is then calculated in the same fashion as the underlying index.
6. What S&P Fair Value Indices are available? Exhibit 2 includes a sampling of our current S&P Fair Value IndicesS&P Dow Jones Indices can calculate fair value versions of any international equity benchmark based on client needs.