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Why Does the S&P 500 Matter to the U.K.?

Exploring the Road to Inflation Protection When Energy Fails

Why Does the S&P 500® Matter to New Zealand?

Why Does the S&P 500® Matter to Hong Kong?

Why Does the S&P 500® Matter to Australia?

Why Does the S&P 500 Matter to the U.K.?

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Tim Edwards

Managing Director, Index Investment Strategy

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Craig Lazzara

Managing Director, Global Head of Index Investment Strategy

EXECUTIVE SUMMARY

This paper examines the S&P 500® from the perspective of a UK-based investor. We examine:

  • The concentration and sectoral makeup of the UK equity market, and the motivations for British market participants to diversify internationally;
  • The role of the UK and the U.S. in the global economy and global equity markets;
  • Potentially complementary aspects of an S&P 500-linked investment for a broad-based British equity portfolio denominated in British pound sterling (sterling); and
  • The differences between the S&P 500 and other indices or active portfolios tracking U.S. equities.

Although this paper provides a perspective on the S&P 500 through the specific filter of an investor with an expected existing bias toward UK equities, many of our observations hold more generally for international investors considering U.S. equities.


INTRODUCTION

Most market participants will have encountered the S&P 500; it is a widely referenced gauge of U.S. equity performance and a popular benchmark for investments. The S&P 500 contains many of the world’s largest and most recognizable companies, with a global reach of operations, customers, and revenue sources.

With the increasing popularity and scale of S&P 500-related products, such as exchange-traded funds (ETFs) and index funds, as well as the derivatives, such as futures and options, there has been a reduction in the typical cost and barriers to entry for S&P 500-linked investments.

For an investor predominantly invested in UK equities, U.S. stocks arise in several investment contexts. Most importantly, U.S. stocks represent a significant proportion of the global opportunity set for diversification. Even if geographic diversification is not a primary objective for the investor, a moderate allocation to U.S. equities might arise through a wish to access to the information technology sector, which is dominated by American brands. Or investors may look to U.S. equities in order to benefit from exposure to the U.S. dollar (dollar), which tends to increase during periods of financial crisis. As Exhibit 1 shows, U.S. equities may also be considered simply because of their absolute performance.

Exhibit 1 provides an example of the cumulative annualized total return and the return/risk ratio1 for various hypothetical combinations of the S&P 500 and S&P United Kingdom over various periods ending in July 2016.

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Exploring the Road to Inflation Protection When Energy Fails

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Aye Soe

Managing Director, Global Head of Product Management

INTRODUCTION

In our recent paper, Let’s Get Real About Indexing Real Assets, global real assets are defined for the first time in an index. The index includes a complete set of liquid real assets (infrastructure, property, natural resources, and inflation bonds) that have been blended using equities, fixed income, and futures. The results demonstrate that the S&P Real Assets Index may provide inflation protection and improve diversification when added to a mix of U.S. stocks and bonds.

The following analysis shows how real assets may provide inflation protection and affect portfolio diversification in different markets around the world, including Australia, Brazil, Canada, China, the Eurozone, Japan, Mexico and South Korea. The results are similar to those from the U.S. where natural resources and inflation bonds may provide the most inflation protection, though the excess returns of these individual assets may not be a satisfactory basis to improve risk-adjusted returns when added to a portfolio mix of traditional assets. Therefore, the combined real assets are an important aspect of trying to achieve a desired level of inflation protection and diversification.


INFLATION PROTECTION

Data and Methodology

The study period is from April 2006 to December 2015, based on the earliest available data for indices that are used as proxies for asset class returns. Monthly year-over-year percent changes in the Consumer Price Index (CPI) levels represent changes in inflation. Exhibit 1 shows the constituent indices inside the S&P Real Assets Index used in the analysis. The index is composed of 50% equities, 40% fixed income, and 10% commodity futures, allowing the full (public) capital structure of real asset companies to be represented.

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Why Does the S&P 500® Matter to New Zealand?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

The S&P 500 is a renowned benchmark for large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of investable market capitalization in the U.S. equity market. As of year-end 2014, over USD 7.8 trillion was benchmarked to the S&P 500, with indexed assets making up USD 2.2 trillion of this total. Exchangetraded products based on the S&P 500 have been cross-listed in various markets across the globe, but what creates the international appetite for U.S. equities, especially the S&P 500?

In this paper, we will:

  • Compare the S&P 500 to the leading equity benchmark in New Zealand;
  • Explore the significance of the S&P 500 in the global equity market; and
  • Compare S&P 500 performance to that of active U.S. large-cap funds.

COMPARISON OF THE S&P 500 AND THE S&P/NZX 50 INDEX

The S&P 500 and the S&P/NZX 50 Index are widely regarded as primary indicators of overall market performance in the U.S. and New Zealand equity markets, respectively. Both indices comprise the largest and mostliquid stocks from their respective markets. However, the indices vary significantly due to the different economic landscapes and financial market developments they reflect.

The S&P 500 currently comprises 500 companies and represents around 80% of the market cap of the U.S. equity market, while the S&P/NZX 50 Index seeks to measure the performance of the largest 50 stocks listed on the Main Board of the NZX and covers approximately 90% of New Zealand equity market capitalization. Both are free-float, market-cap-weighted indices, but the S&P 500 has much greater stock diversification than the S&P/NZX 50 Index.

Compared to the S&P/NZX 50 Index, the S&P 500 is much more diverse in terms of the weight constituents hold in the index. The 10 largest S&P 500 members represent only 18% of the index, and the largest component, Apple, has a weight of just 4%. In contrast, the 10 largest stocks in the S&P/NZX 50 Index dominate 55% of the index, and the largest two members, Spark New Zealand and Fletcher Building, carry stock weights as high as 9% and 8%, respectively.

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Why Does the S&P 500® Matter to Hong Kong?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

The S&P 500 is a renowned benchmark for large-cap, U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of investable market capitalization in the U.S. equity market. As of year-end 2013, over USD 7 trillion was benchmarked to the S&P 500 alone, with indexed assets making up USD 1.9 trillion of this total.1 Exchange-traded products of the S&P 500 have been cross-listed in various markets across the globe, but what creates the international appetite for U.S. equities, especially the S&P 500?

In this paper, we will:

  • Compare the S&P 500 to the leading large-cap equity benchmark in Hong Kong;
  • Explore the significance of the S&P 500 in the global equity market; and
  • Compare S&P 500 performance to that of active U.S. large-cap funds.

COMPARISON OF THE S&P 500 AND THE HANG SENG INDEX

The S&P 500 and the Hang Seng Index are widely regarded as primary indicators of overall market performance in the U.S. and Hong Kong equity markets, respectively. Both indices comprise the largest and most-liquid stocks from their respective markets. However, the indices vary significantly due to the different economic landscapes and financial market developments they reflect.

The S&P 500 currently comprises 500 companies and represents around 80% of the market cap of the U.S. equity market, while the Hang Seng Index consists of 50 constituents and captures approximately 60% of the Hong Kong Stock Exchange. Both indices are free-float market capitalization weighted, but the S&P 500 has much greater stock diversification than the Hang Seng Index.

The 10 largest S&P 500 members represent only 18% of the index, and the largest component, Apple, has a weight of just 4%. In contrast, the 10 largest stocks in the Hang Seng Index dominate 60% of the index, and the two largest members, HSBC and Tencent, carry stock weights as high as 11% and 10%, respectively.

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Why Does the S&P 500® Matter to Australia?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

The S&P 500 is regarded by many as the most well-known and most frequently used benchmark of U.S. large-cap equities. The index includes 500 leading companies and captures approximately 80% coverage of investable market capitalization in the U.S. equity market. As of year-end 2013, over USD 7 trillion was benchmarked to the S&P 500 alone, with indexed assets making up USD 1.9 trillion of this total. Exchange traded products of the S&P 500 have been cross-listed in various markets across the globe, but what creates the international appetite for U.S. equities, especially the S&P 500?

In this paper, we will:

  • Compare the S&P 500 to the leading large-cap equity benchmark in Australia
  • Explore the significance of the S&P 500 in the global equity market
  • Compare S&P 500 performance to that of active U.S. large-cap funds

COMPARISON OF THE S&P 500 AND THE S&P/ASX 200

The S&P 500 and the S&P/ASX 200 are well-known, large-cap equity benchmarks in the U.S. and Australian markets. Both indices represent about 80% of the total market capitalization and comprise the largest and most-liquid stocks of their respective markets. However, they differ significantly due to the different economic landscapes and financial market developments they reflect.

The S&P 500 is highly diversified among sectors, with no single sector dominating more than 20% of the index. Information technology (I.T.) is the biggest sector, accounting for 19% of the index. The financials and healthcare sectors are the other two biggest sectors, representing 16% and 13% of the S&P 500, respectively. The S&P/ASX 200 is highly concentrated in the financials sector, which dominates 45% of the index. Materials is the second-biggest sector with a weight of 17%.

Compared to the S&P/ASX 200, the S&P 500 has significantly higher weighting in the I.T. and healthcare sectors. Some of the biggest I.T. names, such as Apple, Microsoft and Google, are global leaders in the tech hardware, software and internet services industries. These companies represent more than 30% of the S&P 500’s I.T. sector and more than 22% of the S&P Global BMI’s2 I.T. sector. In the healthcare sector of the S&P 500, the three biggest companies are Johnson & Johnson, Pfizer and Merck, which are worldwide providers of healthcare and pharmaceutical products. These companies dominate more than 25% of the S&P 500’s healthcare sector and around 14% of the S&P Global BMI’s healthcare sector.

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