S&P DJI’s Sue Lee examines the importance of the S&P 500 in the global equity opportunity set, key diversification and sector composition differences between notable U.S. equity and Korean benchmarks and the challenges faced by active managers in the U.S. and South Korea to outperform this iconic index.
Ongoing political changes, economic shifts and growing geopolitical tensions are contributing to uncertainty in global markets. In this video, let’s take a closer look at why U.S. equities and the S&P 500® continue to play an important role in global investment strategies in today’s markets and historically across a range of market environments.
Why do U.S. equities matter globally?
The U.S. market has played a major role in the global economy for a long time, and it continues to do so today as the largest contributor to the global GDP. When we look at the global equity opportunity set, using the S&P Global BMI as a reference, U.S. companies play an even bigger role, making up over 60% of the global investable universe.
In the S&P Global BMI, 37 out of the 50 highest-weighted stocks are U.S.-domiciled companies. These companies include globally recognized brands like Apple, Microsoft, Amazon, Google, Coca-Cola and McDonald’s—companies that operate worldwide.
U.S. companies are not just economically significant but they also play a significant role in the global investment landscape. As a result, U.S. equities matter for most equity investors, not just those aiming for broad market exposure.
Why does the S&P 500 matter?
The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. The S&P 500 comprises approximately 500 companies and represents about 80% of the available market capitalization of the U.S. equity market.
Not just this broad coverage, the S&P 500 constituent companies have historically demonstrated higher operating margins compared to global peers represented by the S&P Global BMI. There is also a robust trading ecosystem surrounding the S&P 500 including futures, options and exchange-traded funds. These are traded globally around the clock and provide significant liquidity, helping enable easier and more cost-efficient access to large-cap U.S. equities. Compared to other common U.S. large-cap indices, such as Dow Jones Industrial Average and Nasdaq-100, the S&P 500 has the largest number of constituents, making it the most diverse of these indices. It also reflects the highest market coverage and U.S. revenue exposure relative to The Dow and the Nasdaq-100.
Why is the S&P 500 relevant in South Korea?
The KOSPI 200 is widely regarded as a primary indicator of overall equity market performance in South Korea. So is the S&P 500 for the U.S.
Compared to the KOSPI 200, the S&P 500 has greater diversification among stocks and sectors. When we look at the historical performance of those two indices over the past 15 years, the S&P 500 has demonstrated stronger performance than the KOSPI 200 on both an absolute and risk-adjusted basis.
While both indices exhibited similar levels of volatility over the past 15 years, the S&P 500 experienced a smaller maximum drawdown compared to the KOSPI 200. Notably, the S&P 500 performance improved over the same period in Korean won terms, reflecting the index performance for Korea-based market participants without any currency hedging, due to the strengthening of the U.S. dollar in recent years. Additionally, the U.S. dollar has demonstrated so-called safe-haven characteristics, its historical tendency to appreciate during market corrections, which further contributed to the reduced drawdown of the S&P 500 when measured in Korean won, highlighting the potential benefits of the U.S. dollar exposure embedded in the S&P 500.
The non-perfect correlation between the S&P 500 and KOSPI 200 as well as the negative correlation between the equity market and the U.S. dollar relative to the Korean won demonstrates the potential to diversify risk of a South Korea-based equity strategy. Back-tested hypothetical data from our study showed incorporating U.S. equities into a Korean broad-market equity strategy would have reduced volatility and enhanced historical performance over the period examined.
How have active managers performed versus passive benchmarks historically?
S&P Dow Jones Indices publishes the SPIVA Scorecards, which compares the performance of actively managed funds against benchmarks like the S&P 500. The data shows that a majority of actively managed U.S. equity funds, both in the U.S. and South Korea, have underperformed the S&P 500 over time. This underperformance trend for active managers has tended to expand over longer-time horizons. Put simply, passive tends to outperform active over the long term.
Closing
The U.S. equity market represents a significant portion of the global equity opportunity set. Investing in a diversified basket of U.S. equities has become significantly easier, cheaper and more transparent through the widespread availability of index-linked products around the world, including index funds and ETFs. The S&P 500 includes many of the largest companies in the U.S., and many of these names are the world’s most recognizable companies, with high operating margins. For South Korea-based equity strategies, the greater stock diversification and different sector makeup of the S&P 500 may offer a complementary blend that has historically improved the performance and risk-adjusted return, based on hypothetical back-testing.
Thank you very much. I hope you find this video informative. Please find more details in our paper, Why Does the S&P 500 Matter to Korea?
