Volatility-controlled indices continue to gain popularity in the index-linked insurance product space, with underlying asset class components and index mechanisms increasingly expanding. One mainstay offering, however, has been the multi-asset volatility-controlled index, combining equity, fixed income and an alternative asset class such as gold. With a more diversified asset class mix than a pure equity index, what is this type of strategy’s potential response when interest rates decrease?
Due to the inverse relationship between bond yields and prices, when rates drop, market participants with a weight in fixed income may benefit from price appreciation in the asset class. Additionally, gold also exhibits this relationship with interest rates, meaning prices typically increase with falling rates.
One index that tracks both 10-year U.S. Treasuries and gold is the S&P MARC 5% Index.
What Is the S&P MARC 5% Index?
The S&P MARC 5% Index tracks equities, fixed income and gold via a single index solution. The underlying components are as follows:
- Equity: S&P 500® (ER);
- Fixed Income: S&P 10-Year U.S. Treasury Note Futures Index (ER); and
- Gold: S&P GSCI Gold (ER).
The index weights each component based on the inverse of its volatility and has a target volatility level of 5%. While the weights to each asset class are dynamically adjusted, historically the index makeup has been 60% in fixed income and 20% each in equity and gold.
With a potentially significant weight in fixed income and gold, we will review how it has responded in historical periods in which 10-year Treasury yields dropped, using both back-tested and live data.
S&P MARC 5% Index Performance in Falling Rate Environments
The S&P MARC 5% Index was launched on March 27, 2017, with back-tested data beginning in late 1989. This back-tested period began roughly 10 years into a 40-year fixed income bull market, which includes several trending decreases in the 10-Year Treasury yield.
These four periods represent a drop in this yield between 200 bps and 300 bps, ranging from one and a half to slightly more than three years. In each case, the S&P MARC 5% Index (ER) noticeably outperformed a risk control index with equity-only exposure at the same volatility target, for example the S&P 500 Daily Risk Control 5% Index (ER).
