[TRANSCRIPT]
Jenny Ellice:
Why does index methodology matter when evaluating the next generation of factor solutions?
Hello, I'm Jenny Ellice from Asset TV. Joining me today to discuss the new S&P 500 Factor Indices that track market leaders, quality companies at the intersection of growth and value, and the companies from the S&P 500 returning the most value to shareholders are Liz Bebb of S&P Dow Jones Indices and Sturmius Schneider of Xtrackers.
So, Liz, Sturmius, welcome. So Liz, I'm going to come to you first, and let's zero in about the indices we'll be talking about today. S&P Dow Jones Indices launched the S&P 500 Market Leaders Index, the S&P 500 GARP 100 Index, and the S&P 500 Resilient Shareholder Yield Index at the end of 2024. So, how were these indices designed, and what data sets are powering them, and why are they so unique?
Elizabeth Bebb:
I think they're unique in many ways. When you look at the traditional factor indices, for example, we know that they're usually defined by several metrics which relate to certain characteristics with indices which drive the performance, and the performance can be different in different market environments. When you look at the S&P 500 indices that we've put in the next generation, let's take the S&P 500 Market Leaders Index, for example. That particular index uses a syntax dataset. This dataset is a very granular version of market share scores. So, we can actually calculate market share scores and define leaders by their market shares. When we add in the free cash flow margins, which look at the profitability of those companies, the returns on investing capital metrics that also look at how well the companies generate future returns or generate current returns, we can see that these S&P 500 Market Leaders Indices are quite, the metrics actually tilt toward quality. So. it's very much a quality base. And, then, on top of that, we used the float market caps to do the weighting, tilting back to that Market Leader ideology. And, this also gives some diversification within the index, because we use a stock cap as well of 4.5% per stock, which reduces the Information Technology weights, et cetera. So, they're quite well diversified as well.
And, if we look at the other versions, so, the S&P 500 GARP 100 Index, for example, that version uses a quality-value metric and the growth metrics to derive the actual selection of the constituents. And, on top of that, it uses a float market cap multiplied by the growth score. So, again, you're tilting back to that growth metric. So, the S&P 500 GARP 100 Index looks at a quality-value and growth metric in its construction, which can create a constituent selection that can be very different to the other indices. And, it can be diversified versus the S&P 500, the universe that it comes from. Additionally to that, it uses a growth metric when it's multiplied in the weighting via its float market cap, and that tilts back toward growth as well. So, we see that coming through in the index again.
And, if we look at the S&P 500 Resilient Shareholder Yield Index, we see a similar thing. The S&P 500 Resilient Shareholder Yield Index is looking at the dividend income of those companies, it's looking at the share repurchases of those companies, and it's also looking at the share repurchases. And, those three metrics together are driving a set of performances within that index through the constituent selection and the characteristics that it produces. Alongside that, we actually use the shareholder yield score to actually weight the index as well against float market cap and have that capping again. So, again, you see this methodology being quite unique in these aspects.
Jenny Ellice:
And Sturmius, from your perspective, what was interesting about these indices and why?
Sturmius Schneider:
So, what really stood out for me about these indices is how they captured a hybrid factor signal. So, essentially, they try to codify what active investors have intuitively pursued for many years. Traditional factor indices usually only cover a single dimension for factors, value or growth. And, by blending multiple factors, they can be a very transparent and structural approach to a factor blending.
Take the S&P 500 GARP 100 Index, for example. So, the GARP Index seeks to address a key shortcoming of traditional growth exposure, which, recently is trading at P/E multiples north of 30. These are levels we haven't seen since the dot-com bubble. And, by integrating quality and also valuation characteristics into a growth index, this can actually bring down, or address, this key shortcoming. What's really compelling about these indices is also the methodology. The methodology is very transparent, and that clarity is a key for investors. Investors actually get and can understand what they are getting: a diversified, rules-based approach which is actually addressing what they are looking for in terms of risk and returns.
Jenny Ellice:
And, coming back to you, Liz, can you expand on these indices' performances? How have different factors played out in different environments historically?
Elizabeth Bebb:
Thank you. I think when you think about traditional factor indices in different market environments, they perform in different ways. So, for example, your value factor is going to perform well in cyclically recovering markets. You're going to see, perhaps, good momentum in trending markets, whether they're trending up or down. And, you're also going to see a good performance in quality in most markets. It does very well in the majority of markets. And, when you look at the next generation of indices, or the new generation indices, they're very similar.
We did some analysis research in-house, and what we did was we took each of the macro backdrops, and we looked at it in different ways. So, we categorized markets into high and low growth and high and low inflation. So, we ended up with four different categories. And, when we looked at this particular new generation of indices, what we saw was they performed very differently in very different market environments. So, for example, when we thought about the S&P 500 Resilient Shareholder Yield Index, what we saw was this performs really well in falling growth, rising inflation markets. The S&P 500 GARP 100 Index does really well in rising growth and falling inflation markets. But, the S&P 500 Market Leaders Index actually performs quite strongly across all markets. And, that's because of various factors. Both the methodology construction we've talked about before, but, also, because of the fact that its quality bias and those characteristics are showing through. So, quality tends to do well in most markets.
Jenny Ellice:
And Sturmius, how are you seeing market participants using factor strategies in their portfolios, and what's driving decision-making?
Sturmius Schneider:
So, we're seeing two types of factor investors. On the one hand, there are factor investors that use factor products strategically. So, they believe in the long-term factor premium and allocate to the same factor over a long time. On the other hand, there are factor investors that use factor products, or factor indices, more tactically. So, they would, based on, for example, the macroeconomic environment indicators, rotate from one factor to another. And, what's very interesting about the S&P DJI indices that we're talking about is that they address actually both types of factor investors. So, on the one hand, they show in simulations, over very long periods, they show improved risk-adjusted performance. And, on the other hand, they have a clear factor tilt. So, the S&P 500 GARP 100 Index aligns with growth, the S&P 500 Market Leaders Index with quality, and the S&P 500 Resilient Shareholder Yield Index with value and minimal volatility. So, well-known and traditional factor exposures.
Unlike sector investing, factor investing is not a zero-sum game. So, blending different factors can actually rather enhance than dilute portfolio outcomes, and they feel particularly relevant in today's market environments. So, equity valuations are skyrocketing, concentration is increasing, and dividend yields, for example, of the S&P 500, they have compressed toward 1%. So, a difficult market environment. And, identifying companies that may be the market leaders of the future, or identifying companies that are growth companies and that have growth potential, but still at reasonable valuations, or companies that offer total shareholder returns, is actually an interesting way to navigate today's markets. This allows investors to seek for different performance and return drivers in today's environment.
Jenny Ellice:
That's really interesting, and it shines a light on why index methodology is so important, especially when looking at this new generation of factor indices. So, Liz and Sturmius, thank you for joining us.
Well, to learn more about S&P DJI’s factor indices and to explore the latest factor research and data, visit the link below.
