IN THIS LIST

Fleeting Alpha Scorecard: The Challenge of Consistent Outperformance Year-End 2019

The VIX Index and Volatility-Based Global Indexes and Trading Instruments

How Smart Beta Strategies Work in the Australian Market

ETFs in Insurance General Accounts – 2020

The S&P Composite 1500®: An Efficient Measure of the U.S. Equity Market

Fleeting Alpha Scorecard: The Challenge of Consistent Outperformance Year-End 2019

Contributor Image
Berlinda Liu

Director, Global Research & Design

Contributor Image
Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

SUMMARY

The Fleeting Alpha Scorecard is a semiannual report showing how well outperforming mutual funds from one three-year period continue to outperform thereafter. It combines two other S&P Dow Jones Indices reports, the SPIVA® U.S. Scorecard and the the Persistence Scorecard. The former measures the percentage of active managers that beat their benchmarks across various equity and fixed income categories. The latter shows the likelihood that strong performers in early periods maintain their status relative to other funds in subsequent periods.

For the Fleeting Alpha Scorecard, we first identify funds that beat their benchmarks, based on three-year annualized returns, net-of-fees. We then examine whether these funds continue to outperform during each of the next three one-year periods.

Report 1 shows the performance persistence of managers investing in various domestic and international equity categories, based on trailing three-year returns. Of the 18 categories in domestic equity, eight did not show funds with alpha persistence after three years. For example, as of Dec. 31, 2016, roughly 10% of 313 large-cap value funds had outperformed the S&P 500® Value in the previous three years. By the end of 2019, none of these 31 winners had maintained that status for three consecutive years. Of the winners at the end of 2016, just 12.9% of all domestic equity funds beat the S&P Composite 1500® in each of the three following one-year periods.

The vast majority of domestic equity funds showed little outperformance persistence, with notable exceptions in the small- and mid-cap spaces. Improvement in persistence mainly came from the mid-cap growth funds and the small-cap growth funds, in which 67% and 50%, respectively, of the past winners were able to generate positive alpha in the three subsequent one-year periods (in a small sample size).

pdf-icon PD F Download Full Article

The VIX Index and Volatility-Based Global Indexes and Trading Instruments

Contributor Image
Berlinda Liu

Director, Global Research & Design

Contributor Image
Matt Moran

Vice President of Business Development, Chicago Board Options Exchange (Cboe)

The Cboe Volatility Index® (VIX® Index) measures the market’s expectation of future volatility conveyed by S&P 500 Index option prices. The VIX is recognized as a premier gauge of expected US equity market volatility. The 2000–09 decade experienced two deep bear markets for equities that saw numerous short-term periods of high levels of investor uncertainty. Most investors recall how during the financial crisis of 2008–2009, the correlations between equities rose globally and traditional diversification goals became difficult to achieve. Exchange-listed VIX futures were launched in 2004, and VIX options were launched in 2006. During the 2008–09 financial crisis, VIX futures and VIX options experienced tremendous growth, as interest in and use of such index-based products as exchange-traded notes and exchange-traded funds grew. These products have become widely used in investors’ strategies ranging from trading tactical views on volatility to incorporating volatility trades and hedges in risk management and multiasset strategies.

This study addresses several questions investors have asked related to the VIX Index, volatility-based trading products, and the use of VIX futures in portfolio construction. These questions include the following:

  1. What does the VIX Index measure, and what does a VIX level signify?
  2. What are some indexes that measure expected volatility of European or Asian stock indexes?
  3. How do features such as convexity and negative correlation make the VIX an intriguing investment gauge?
  4. Is the VIX Index tradable, and if not, why?
  5. What tradable volatility-based futures and options products are available?
  6. How do contango and backwardation affect the returns of VIX futures-based strategies?
  7. What volatility benchmark indexes are available, and what is their impact when added to S&P 500 portfolios?

pdf-icon PD F Download Full Article

How Smart Beta Strategies Work in the Australian Market

Contributor Image
Priscilla Luk

Managing Director, Global Research & Design, APAC

Contributor Image
Liyu Zeng

Director, Global Research & Design

EXECUTIVE SUMMARY

With increasing interest in smart beta strategies in the Australian equity market, we examined the effectiveness of six well-known risk factors, size, value, low volatility, momentum, quality, and dividends, in the Australian equity market from Dec. 31, 2004, to May 29, 2020.

  • Quintile analysis showed that low volatility, high momentum, and high quality delivered the most persistent absolute and risk-adjusted return spreads, but small cap and value did not generate incremental return in the Australian market.
  • Among the Australian factor indices offered by S&P Dow Jones Indices (S&P DJI), the quality and momentum indices delivered the highest excess returns, while the low volatility and dividend indices had lower volatility than the S&P/ASX 200.
  • Our macro regime analysis showed that most factor portfolios in Australia were sensitive to local market cycles and investor sentiment regimes.
  • The distinct cyclicality of factor performance in Australia indicated its potential for implementation of active views on the local equity market.
research-how-smart-beta-strategies-work-in-the-australian-market-exhibit1

FACTOR-BASED INVESTING IN THE AUSTRALIAN EQUITY MARKET

Smart beta strategies have gained significant attention in the asset management industry, and the exchange-traded products (ETPs) tracking factor indices have experienced significant asset growth since the end of 2008. Factor-based strategies are a category of smart beta strategies that target specific risk factors.  They share some common characteristics with passive investing, such as rules-based construction, transparency, and cost-efficiency, and they also share features of active investing in that they aim to enhance return and reduce risk compared to market-cap-weighted indices.

Single-factor indices are constructed explicitly to capture a specific risk factor and exhibit distinct cyclicality in response to a changing market environment, which also makes them ideal tools for implementation of active views. 

In Australia, although the adoption of factor-based investing by local market participants is behind the U.S. and some Asian markets (like Japan), the growth of factor-based ETPs has accelerated in recent years, achieving 46% growth in net assets in the past 18 months in local currency terms as of Dec. 31, 2018, and accounting for 10.5% of the Australian ETF market. Dividend products still dominate the Australian factor-based ETP market, but we observed the proliferation in categories and the increasing demand for factor-based index-linked products within the Australian equity market.

Based on the performance contribution analysis for the S&P/ASX 200 portfolio, the Financials and Materials sectors contributed about 63.6% of the total performance of the portfolio for more than 15 years.  At a stock level, the top five large-cap contributors (BHP Group Ltd, Commonwealth Bank of Australia, Westpac Banking Corporation, CSL Limited, and Australia and New Zealand Banking Group Limited) together contributed approximately 49% of the total portfolio performance over the same period.  This suggests that sector or size bias might have  a significant impact on the excess return of factor portfolios in the Australian market.

In this paper, we examined the effectiveness of six well-known risk factors (size, value, low volatility, momentum, quality, and dividend) in the Australian equity market and the behavior of these factors under different market regimes.

pdf-icon PD F Download Full Article

ETFs in Insurance General Accounts – 2020

Contributor Image
Raghu Ramachandran

Head of Insurance Asset Channel

INTRODUCTION

In our first report in 2015, we used historical trends to project that insurance companies would double their use of exchange-traded funds (ETFs) in five years. Now five years later, usage of ETFs in insurance general accounts has indeed doubled since 2015. In the one-year period ending Dec. 31, 2019, insurance companies increased their ETF assets under management (AUM) by 16% to reach USD 31.2 billion. We saw companies increase their use of Equity and Fixed Income ETFs. While the overall use of ETFs increased, we did observe some parts of the industry that had been active in using ETFs pull away. Although the use of Fixed Income ETFs increased, the use of Systematic Valuation (SV) declined.

OVERVIEW

As of year-end 2019, U.S. insurance companies had USD 31.2 billion invested in ETFs. This represents a tiny fraction of the USD 4.4 trillion of ETF AUM and an even smaller portion of the USD 6.7 trillion in admitted assets of U.S. insurance companies. Exhibit 1 shows the use of ETFs by U.S. insurance companies over the past 16 years.

pdf-icon PD F Download Full Article

The S&P Composite 1500®: An Efficient Measure of the U.S. Equity Market

Contributor Image
Phillip Brzenk

Senior Director, Strategy Indices

Contributor Image
Hamish Preston

Director, U.S. Equity Indices

Contributor Image
Aye Soe

Managing Director, Global Head of Core and Multi-Asset Product Management

EXECUTIVE SUMMARY

Launched in 1995, the S&P Composite 1500 (hereafter the "S&P 1500") serves as a benchmark indicator for U.S. equity market performance, aggregating price movements of S&P 500®, S&P MidCap 400®, and S&P SmallCap 600.

The S&P 1500 also increasingly serves as a basis for constructing portfolios designed to deliver a "market" return at lower cost than those active managers who offer to beat it. We shall examine the S&P 1500 from both perspectives, as well as examining its merits in comparison to popular alternatives. In particular, we observe that:

  • The sizeable representation of U.S. companies means tracking U.S. equity market performance may be relevant to investors, globally;
  • The S&P 1500 has outperformed the S&P 500, historically;
  • Incorporating smaller companies in a U.S. market benchmark provides a more holistic view of the U.S. economy (see Exhibit 7); and
  • Compared with other U.S. equity market indices, the S&P 1500 avoids relatively illiquid, lower priced, and lower quality stocks (see Exhibit 1).

MEASURING THE U.S. EQUITY MARKET

U.S. companies represented an average of 49.47% of the S&P Global BMI’s capitalization at each year-end between 1995 and 2019, more than five times the average weight of second-place Japan (9.39%). Given that U.S. companies also accounted for over 50% of the market capitalization in most global industries at the end of 2019, many investors may need to turn to the U.S. in order to obtain certain exposures.

The S&P 1500 is designed for investors seeking to replicate the performance of the U.S. equity market, or benchmark against a representative universe of tradable stocks. The S&P 1500 combines three widely followed indices—the S&P 500, S&P MidCap 400, and S&P SmallCap 600—in proportion to their free-float market capitalizations. Hence, the S&P 1500 uses the same inclusion criteria as its three component indices.

pdf-icon PD F Download Full Article

Processing ...