The Hidden Costs of Retail Purchases in Municipal Bonds

IN THIS LIST

An Index Approach to Factor Investing in India

A Case for Dividend Growth Strategies

ETFs in Insurance General Accounts – 2022

The Relevance of U.S. Equities to Latin America

Research - Jul 14, 2022

Jason Giordano

Director, Fixed Income

S&P Dow Jones Indices

Executive Summary

Despite recent innovations providing greater access to bond markets, the tax-exempt municipal bond investor base is still dominated by retail buyers.
Independent research on retail transactions has shown an average loss in income of 0.55%. In a low-rate environment, this number reflects a substantial potential disadvantage to retail bond buying.
These costs could potentially be avoided by accessing bonds through mutual funds or ETFs. ETFs have a distinct advantage in that shares of the fund can be exchanged without the need to incur any transactions in the institutional market.
In a low-yield environment, retail transaction costs can be a significant cause of erosion of potential returns.

Hidden Risks

Owning individual bonds has its risks and rewards. However, buying a bond may also entail an unseen transaction cost that might not always be clear to purchasers. This transaction cost exists because individual bonds are not typically sold with a commission. Instead, a markup is built into the bond price.

This report offers a transparent look at these hidden transaction costs for U.S. municipal bonds. To determine these costs, we used large, recently issued investment-grade bonds tracked by the S&P National AMT-Free Municipal Bond Index and the S&P AMT-Free Municipal Index Series, and high-yield municipal bonds tracked by the S&P Municipal Bond High Yield Index, in conjunction with bond transaction data provided by the Municipal Securities Rulemaking Board (MSRB). This information can help market participants compare the cost of buying individual bonds to the cost of investing in bond alternatives, such as mutual funds and ETFs.

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Research - Jun 23, 2022

An Index Approach to Factor Investing in India

Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

Introduction

Interest in factor investment solutions have significantly risen in the past decade. In general, factor investing refers to an approach that targets stock characteristics that drive the difference in expected returns over the long term. Sometimes, factor investing is referred to as smart beta, or strategic beta, because the factor approach will deviate the underlying portfolio from the market portfolio (the market beta) in a systematic method. Some of the common factors that have been well documented in academic literature and adopted by the investment industry include low volatility, momentum, quality and value. Most of the evidence has been strong and promising that those factors can generate excess returns over the historical sample periods. As of March 31, 2022, factor ETFs managed about USD 1.6 trillion assets globally, a 24.6% CAGR compared with the USD 178 billion 10 years ago.

How did these factors perform in the Indian market? Can investors access factor performance through an indexing approach? What are some applications of factor indices in the Indian market? In this paper, we introduce the S&P BSE Factor Index Series, which implements the factor investing framework through an indexing approach to reflect the performance of the low volatility, momentum, quality and value factors.

In the following four sections, we provide brief descriptions of the S&P Dow Jones Indices (S&P DJI) approach to each of the common factors. We will then provide an extensive discussion on the performance of the four factor indices, and a potential approach to combining the four factor indices to form an alternative for core equity allocation.

In each of the introductory sections, we follow the same framework to present the factors. The underlying index universe to construct the S&P BSE Factor Index Series is the S&P BSE LargeMidCap, which is designed to represent the top 85% of the total market cap of the S&P BSE AllCap. The S&P BSE LargeMidCap was launched in 2015, with the first value available in September 2005, so we use back-tested historical data starting on Sept. 30, 2005, to study the full sample period performance of each factor. Every six months, at month-end in March and September, we sort the constituents of the S&P BSE LargeMidCap in order by each factor. We then form equal-weighted quintiles and market-cap-weighted quintiles from those sorted values, denoting Quintile 1 as the stocks with the highest exposure to the factor and Quintile 5 as the stocks with the lowest exposure. We are interested in whether Quintile 1 generates better performance than Quintile 5. The performance of Quintile 1 tends to be more important, especially for long-only investors. We analyze the performance from both the annualized compound return and the risk-adjusted return perspectives.

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Research - Jun 13, 2022

A Case for Dividend Growth Strategies

Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones 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 Global Financial Crisis and the even lower-rate environment we have seen since 2020, as the world deals with the economic fallout from COVID-19. Entering 2022 with continuing global economic uncertainties, geopolitical disputes, high inflation and rising rates, a dividend growth strategy focusing on dividend sustainability and financial quality remains attractive.

With the volatile economic situation that has emerged since 2020, and market uncertainties putting pressure on corporate earnings, high-yielding companies without strong financial strength and discipline may not be able to sustain future payout and could be prone to dividend cuts and suspensions.

Stocks with a history of dividend growth, on the other hand, could present a compelling investment opportunity in an uncertain environment. 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 (see the Appendix for an overview of the index’s methodology). 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 U.K., Pan Asia and Japan.

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Research - May 25, 2022

ETFs in Insurance General Accounts – 2022

Raghu Ramachandran

Head of Insurance Asset Channel

S&P Dow Jones Indices

Introduction

In 2021, U.S. insurance companies added USD 1.5 billion in exchange-traded funds (ETFs) to their general account portfolios. By year-end 2021, U.S. insurers increased their ETF AUM by 15% from 2020. This 2021 growth was in line with long-term trends; in the 18 years since 2004, insurance companies have increased their ETF AUM by 15% annually. Historically, insurance companies have invested in Equity ETFs even though the majority of their assets are in Fixed Income securities, and Equity ETFs still dominate insurance ETF holdings. However, with the increasing acceptance of Fixed Income ETFs, we saw a significant increase in flows into these ETFs from insurance companies. Indeed, in 2021, insurance companies added to Fixed Income ETFs while removing funds from Equity ETFs. In our seventh annual study of ETF usage in U.S. insurance general accounts, we also analyzed the trading of ETFs by insurance companies. On average, insurance companies traded twice as many ETFs during the year as they held at the beginning of the year. Overall, 2021 trade volume was relatively flat compared with 2020. This was primarily because intra-year turnover declined by 24%.

Holding Analysis

Overview

As of year-end 2021, U.S. insurance companies invested USD 45.4 billion in ETFs. This represented only a fraction of the USD 7.2 trillion in U.S. ETF AUM and an even smaller portion of the USD 7.8 trillion in invested assets of U.S. insurance companies. Exhibit 1 shows the growth of ETFs by U.S. insurance companies over the past 18 years

ETFs in Insurance General Accounts – 2022 : Exhibit 1

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Research - May 11, 2022

The Relevance of U.S. Equities to Latin America

Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

María Sánchez

Director, Sustainability Index Product Management, U.S. Equity Indices

S&P Dow Jones Indices

Fei Wang

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

It is common for equity investors to overweight their home countries relative to the global opportunity set. Such a "home bias" means that many investors may be underallocated to U.S. equities, which accounted for 59% of global equity float market capitalization as of the end of 2021. In this paper, we:

- Highlight the relative size of the U.S. equity market, including mid- and small-cap companies;

- Demonstrate how incorporating U.S. equities can diversify domestic sector biases, provide exposure to U.S. economic growth and potentially improve risk-adjusted returns (see Exhibit 1);

- Introduce the S&P 500^®, S&P MidCap 400^® and S&P SmallCap 600^®, collectively known as the S&P Composite 1500^®; and

- Show how active managers have found it difficult to outperform index benchmarks, historically.

The Relevance of U.S. Equities to Latin America: Exhibit 1

Relevance of U.S. Equities

Although definitions of "the market" can vary depending on one's investment objective and domicile, market participants excluding U.S. companies from their investment strategies could risk overlooking a significant portion of the global equity opportunity set.

Exhibit 2 shows that U.S.-domiciled companies accounted for 59% of the global equity market at the end of 2021. This was more than nine times the weight of the second biggest country, Japan, and more than 70 times larger than the Brazil, Chile, Colombia, Mexico and Peru segments of the S&P Global BMI, combined.

The Relevance of U.S. Equities to Latin America: Exhibit 2

The importance of U.S. equities is even more acute within some market segments. For example, Exhibit 3 shows that U.S.-domiciled companies accounted for most of the weight in 6 of the 11 global GICS^® sectors at the end of 2021 and more than two-thirds of the weight in 3 sectors. Combined with the distinct sectoral composition of the U.S. equity market—for example, Appendix B shows that countries across Latin America typically have far less exposure to Information Technology, Health Care and Communication Services—U.S. exposure may be necessary to address domestic sector biases.

The Relevance of U.S. Equities to Latin America: Exhibit 3

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