In This List

S&P 500® 2018: Global Sales

Building Better International Small-Cap Benchmarks

The S&P MidCap 400®: Outperformance and Potential Application

A Case for Dividend Growth Strategies

ETFs in Insurance General Accounts 2019

S&P 500® 2018: Global Sales

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Howard Silverblatt

Senior Index Analyst, Product Management

YEAR IN REVIEW

  • In 2018, the percentage of S&P 500 sales from foreign countries decreased, after slightly increasing last year, and declining the prior two years. The overall rate for 2018 was 42.90%, down from 2017’s 43.62% and 2016’s 43.16%. The recent high mark was 2014’s 47.82%, and the recent low mark was 2003’s 41.84%. S&P 500 foreign sales represent products and services produced and sold outside of the U.S.
  • Sales in Asia slightly declined, while technically remaining the highest of any region, with the use of six-digit precision. Asia accounted for 8.24% of all S&P 500 sales, down from 8.26% in 2017 and 8.46% in 2016, but up from 2015’s 6.77% and 2014’s 7.80%.
  • European sales posted their fifth consecutive year of gains, at just a tick lower than Asia. For 2018, European sales increased to 8.24% of all sales, up from 2017’s 8.14%, 2016’s 8.13%, 2015’s 7.79%, and 7.46% in 2014. The UK (which is part of European sales) increased to 1.49% in 2018 from 2017’s 1.12% and 2016’s 1.10%.
  • Japanese sales again decreased in 2018, to 1.14% from 2017’s 1.51% and 2016’s 1.52%. African sales inched down as well, to 3.82% from 2017’s 3.90% and 2016’s 3.97%. Sales in Canada declined to 1.98% from 2017’s 2.16% and 2016’s 2.67%.
  • Information Technology continued to have the most foreign exposure of any sector, increasing to 58.19% in 2018 from 56.85% in 2017 and 57.15% in 2016. Energy, which was the sector leader in 2016, with 58.88%, declined to 51.28% in 2018 from 54.06% in 2017.
  • Pro forma tabulations for Communication Services (formerly Telecommunication Services) showed that 44.74% of sales were foreign.
  • Given the ongoing debate and legislative actions on sales, tariffs, and jobs, the level of specific data disclosed by companies continues to be disappointing.


OVERVIEW

In 2002, we removed foreign issues from the S&P 500. However, being an American company (or defined as an American company) doesn’t mean you’re not global. While globalization is apparent in almost all company reports, exact sales and export levels remain difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intracompany sales—and hence, profits—are sometimes structured to take advantage of trade, tariffs, taxes, and regulatory policies. Changes in domicile, inspired by tax savings and nationalistic policies, have also changed the technical classification of what is considered foreign. Therefore, the resulting reported data available to shareholders is significantly less substantial and less revealing than the data that would be necessary to complete a truly comprehensive analysis. However, using the data that is publicly available, we do offer an annual report on foreign sales, which is designed to be a starting point that provides a unique glimpse into global sales composition, but it should not be considered a statement of exact values.

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Building Better International Small-Cap Benchmarks

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Phillip Brzenk

Senior Director, Strategy Indices

INTRODUCTION

Since the documentation of the size premium, a market participants have increasingly seen small-cap stocks as a distinct asset class and have started to maintain a dedicated, separate allocation apart from large caps. In recent years, research has shown that quality is the prominent driver of returns in the small-cap space.b Asness et al. found that the variability of the size effect mainly stemmed from the volatile performance of low-quality, or junk, small-cap firms. When junk or low quality is controlled for, the size premium becomes more robust in nature and is found across industries, time periods, and 23 different markets.

Based on evidence found in “A Tale of Two Benchmarks: Five Years Later” and effectiveness across regions in Asness et al., we investigated whether quality has earned a similar premium in international small-cap benchmarks. We tested a number of profitability metrics and found that for international small-cap universes, companies with positive earnings, or higher profitability ratios, incorporated as an inclusion requirement outperformed portfolios without such a requirement. The results were consistent regardless of the profitability metric used and region tested.

In order to capture the positive earnings return premia seen in the profitability metrics testing results, the S&P Global SmallCap Select Index Series was launched in late 2018. The series is designed to measure the performance of small-cap companies with positive earnings, with most based on the S&P Global BMI universe. The series includes indices representing multiple regions, such as global, global ex-U.S., developed exU.S., and emerging markets. It provides several key benefits over traditional small-cap benchmarks, including improved risk-adjusted returns (see Exhibit 2), low tracking error, and enhanced liquidity. We additionally found that the series raises the bar for active manager performance measurement relative to the traditional small-cap benchmarks (see Exhibit 19).

EARNINGS RETURN PREDICTABILITY

A profitability requirement—even something as simple as screening out unprofitable companies using earnings per share (EPS)—could have a positive return impact for an international small-cap benchmark.

To determine if profitability is a driver of performance in the international small-cap space, we explored six common measures of profitability. These are EPS,1 asset turnover, gross profit margin, gross profitability, return on assets (ROA), and return on equity (ROE).2 We compared the six-month forward returns of companies with positive (or higher) profits to ones with negative (or lower) profits. To check if geographical differences played a role, we tested the metrics across four universes, including global, global ex-U.S., developed ex-U.S., and emerging markets.

Monthly, we ranked companies in each universe and grouped them into quintiles, with the most profitable (highest) companies placed into the Quintile 1 and least profitable (lowest) companies placed into Quintile 5. For EPS, we placed companies in two groups, companies with positive earnings and companies with negative earnings. We equally weighted companies within each group to avoid size bias and calculated returns in local currency to avoid currency effect. Exhibit 3 shows the average of the forward six-month returns for each metric from November 1999 to April 2018.

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The S&P MidCap 400®: Outperformance and Potential Application

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Hamish Preston

Associate Director, U.S. Equity Indices

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Louis Bellucci

Senior Director, Index Governance

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Aye Soe

Managing Director, Global Head of Product Management

EXECUTIVE SUMMARY

Mid-cap stocks have often been overlooked in favor of other size ranges in investment practice and in academic literature. Yet mid-caps have outperformed large- and small-caps, historically: the S&P MidCap 400 has beaten the S&P 500® and the S&P SmallCap 600® by an annualized rate of 2.03% and 0.92%, respectively, since December 1994. To better understand the historical outperformance by mid-caps, as well as their potential use within an investment portfolio, this paper:

  • Provides an overview of S&P Dow Jones Indices’ methodology for defining the U.S. mid-cap equity universe;
  • Outlines the so-called “mid-cap premium,” analyzing it from factor and sector perspectives;
  • Shows that active managers have underperformed the S&P MidCap 400, historically;
  • Highlights how mid-caps can be incorporated within a portfolio.

INTRODUCTION

U.S. equity indices have a long history of measuring the performance of market segments. The Dow Jones Transportation Average™, the first index and a precursor to the Dow Jones Industrial Average®, was created in 1884. The inaugural capitalization-weighted U.S. equity index was first published in 1923 and evolved into today’s widely followed 500-company U.S. equity benchmark—the S&P 500.

More recently, after academic literature demonstrated the existence of a size factor, index providers developed benchmarks to track the performance of smaller companies. Among them were the S&P MidCap 400 and the S&P SmallCap 600, launched in June 1991 and October 1994, respectively.

Despite the historical outperformance of mid-cap stocks, they appear to be under-allocated compared to small-caps. Exhibit 2 shows the proportion of assets invested in core U.S. equities, across the large-, mid-, and small-cap size ranges, by U.S.-domiciled retail and institutional funds at the end of 2018. Based on overall market capitalization, we might expect funds to allocate twice as much to mid-caps compared to smallcaps. Instead, the aggregate core allocation to small- and mid-caps is approximately the same: investors appear to have a preference for smallcaps over mid-caps in their core holdings. The data shows this preference is especially true for active funds.

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A Case for Dividend Growth Strategies

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

Dividend strategies have gained a foothold with market participants seeking potential outperformance and attractive yields, especially in the low-rate environment since the 2008 financial crisis.

While traditional high dividend payers have performed strongly in recent years, they have become quite expensive by most valuation metrics. The previous low-interest-rate environment paved the way for many of these businesses to load up on debt to expand their operations, while continuing to pay high dividends. As a result, many of these companies may come under pressure when rates rise.

Stocks with a history of dividend growth, on the other hand, could present a compelling investment opportunity in an environment of potential volatility and rising rates. An allocation to companies that have sustainable and growing dividends may provide exposure to high-quality stocks and greater income over time, therefore buffering against market volatility and addressing the risk of rising rates to some extent.

This argument goes beyond the traditional realm of domestic large-cap stocks. It also works for small- and mid-cap stocks and can be applied to international markets as well.

The S&P High Yield Dividend Aristocrats® is designed to track a basket of stocks from the S&P Composite 1500® that have consistently increased their dividends every year for at least 20 years. This paper investigates the benefits of a dividend growth strategy by analyzing the characteristics of the S&P High Yield Dividend Aristocrats and comparing it to the S&P 500® High Dividend Index—a high-dividend strategy built on the S&P 500. In addition, this paper illustrates a few indices that focus on the strongest dividend growers in global and international markets, including Canada, the eurozone, the UK, Pan Asia, and Japan.


WHY DIVIDEND GROWERS?

Quality

Dividend growth stocks tend to be of higher quality than those of the broader market in terms of earnings quality and leverage. Quite simply, when a company is reliably able to boost its dividend for years or even decades, this may suggest it has a certain amount of financial strength and discipline.

Looking at the S&P High Yield Dividend Aristocrats, while the hurdle for index inclusion is 20 straight years of increasing dividends, the index average is 36.7 years. Additionally, there are eight constituents with over 56 consecutive years of dividend increases.

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ETFs in Insurance General Accounts 2019

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Raghu Ramachandran

Head of Insurance Asset Channel

INTRODUCTION

In our last report, we showed that in 2017, insurance companies increased their use of exchange-traded funds (ETFs) by a significant amount (37% year-over-year). In 2018, insurance companies continued to increase their use of ETFs and, in spite of a market correction in the Q4 2018, held ETF assets in line with long-term growth trends. Furthermore, in 2018, the industry also displayed a divergence in their investment patterns—with companies that had previously been slow to adopt ETFs increasing their usage, and other companies, which in the past had grown ETF usage rapidly, retrenching. A divestment from Smart Beta ETFs, in particular, caused a drag on the overall share ownership and AUM of insurance companies invested in ETFs. In our fourth annual analysis of ETF usage in insurance general accounts, we explore the changing dynamics and current usage of over 1900 companies in this market.

OVERVIEW

As of year-end 2018, U.S. insurance companies had USD 26.2 billion invested in ETFs. This represents a tiny fraction of the USD 3.4 trillion of ETF assets under management (AUM) and an even smaller portion of the USD 6.3 trillion in admitted assets of U.S. insurance companies. While ETF AUM steadily increased over the prior six years, in 2018, the AUM of ETFs in the industry declined for the first time since 2011. In 2018, U.S. insurance company ETF AUM decreased by 3% from the prior year. However, usage still showed a double-digit compound annual growth rate (CAGR) over the 3-, 5-, and 10-year periods.

The last quarter of 2018 had marked downturn in the equity and fixed income markets. The S&P 500 dropped 14% in the 4th quarter; a week before year-end the S&P 500 was off 20%. On December 19th, 2018 the Federal Reserve increased the Fed Funds rate for a fourth and last time in 2018. And even though 10-year Treasury and corporate yields fell during the quarter, corporate spread increased by a larger amount in the Q4 2018. To test if market volatility in Q4 2018 depressed the year-end AUM numbers, we also looked at the number of shares held by insurance companies. Unlike AUM, the number of shares of ETFs used by insurance companies continued to increase in 2018.

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