S&P Dow Jones Indices (S&P DJI) offers style and pure style indices, which categorize companies across the market cap spectrum based on their growth and value characteristics. Both sets of indices provide perspectives on the performance of value-oriented companies versus their growth-oriented counterparts, as well as forming the basis for index-linked products and benchmarks, globally.
However, the S&P Style and S&P Pure Style Indices are constructed differently, and this has important effects on their characteristics and potential applications. Updating earlier analysis, this paper:
-Explains the construction of the S&P Style and S&P Pure Style Indices;
-Compares the characteristics of both index series, including risk/return profiles, exposures to style factors and the impact of different weighting schemes; and
-Highlights the potential application of both sets of indices, including the historical benefits of taking an indexed-based approach.
Exhibit 1 shows that, on average, the pure style indices outperformed their style index counterparts in months when their respective style was in favor.
Launched in 1992, the S&P U.S. Style Indices are designed to provide broad exposure to style segments across the market cap spectrum. The indices use relevant fundamental ratios to divide the investment universe into growth and value categories. Each style category accounts for around 50% of the underlying index weight at the time of the annual reconstitution, and companies that exhibit both growth and value characteristics have their market capitalization distributed between growth and value.
Exhibit 2 shows that roughly one-third of each size segment possessed both growth and value characteristics. For example, year-end data since 2009 shows that an average of 165 securities in the S&P 500®, 131 securities in the S&P MidCap 400® and 188 securities in the S&P SmallCap 600® fell into both the growth and value indices.
The S&P U.S. Style Indices' exhaustive coverage may be relevant for investors seeking broad style exposure, and the indices can help to define the broad opportunity set for active managers looking to express style views. However, the overlapping nature of the indices may not appeal to market participants that desire more precise and focused measurement tools.
Launched in 2005, the S&P Pure Style indices offer narrower exposures to style segments and they are more discerning when selecting growth- and value-oriented companies. Indeed, the pure style indices only include the most growth- and value-oriented companies, and there are no overlapping securities between the pure growth and pure value baskets (see Exhibit 3).
Exhibit 4 summarizes the rules governing the style and pure style index series. Both sets of indices use the same style descriptors—three for growth and three for value—to measure style characteristics. The choice of these descriptors was based on time series, cross-sectional and data coverage analyses on a range of style descriptors found in peer-reviewed academic literature.
Exhibit 4 also highlights the methodological differences between the two index series, including stock selection rules and weighting schemes. As we shall see in forthcoming sections, these differences led style and pure style indices to have distinct characteristics.