Research

Given the constantly evolving nature of ESG investing, Syntax believes gaining clarity is of the utmost importance to the growing number of investors in this space. Consequently, we are focused on educating investors on ESG topics and using our proprietary data to provide unparalleled transparency on the ESG characteristics of their portfolios. In this installment of our “Breaking Down the Basics” series, we explore the topic of ESG reporting standards and frameworks. 

What lies beneath the S&P Consumer Discretionary Select Sector ETF (XLY)

September 8, 2022 (New York, NY) – LOGICLY, a U.S. fintech company and leading provider of analytics and portfolio tools to the wealth management industry, today announced the formation of a strategic partnership with Syntax Indices, a leading index provider and financial analytics company. The partnership will create the first thematics-based, investor values-driven portfolio construction and management platform for wealth management firms and advisors.

New York, NY (September 8, 2022) – Syntax Indices (“Syntax”), a leading financial technology company, announced today that Syntax has been selected as the data provider by Legal and General Investment Management (LGIM), one of the UK's leading financial services groups and a major global investor, for the underlying index of the L&G Metaverse ESG Exclusions UCITS ETF. 

The 3.6% sell-off in the S&P 500 on Friday (4/29) capped a dismal April for the world’s most traded index (-8.72%). 

As we wrote in our February note Regime Shifts: Why the S&P 500 could underperform Alternatively Weighted ETFs, “[the S&P 500] is highly exposed to several potential headwinds in 2022, including interest rate hikes, rising vaccination rates, increased regulation, and overly optimistic valuations. A change in the prevailing market dynamic could cause one (or more) of these headwinds to reverse the long-run market trends and see cap weighted indices underperform alternatively weighted products. The Stratified LargeCap Index outperformed its cap weighted counterpart by 3.12% in April.” 

 Key Points 

Why the S&P 500 could underperform Alternative Weighted ETFs: an analysis of three types of regime shifts and how they may cause headwinds for the S&P 500 and other cap-weighted strategies.

The crippling supply chain problems, which were widely reported in September and early October, are now being discounted as a transitory hiccup, rather than a more troubling symptom of the Pandemic. Using Syntax’s Affinity data, we calculate the supply chain exposures of a wide range of benchmarks and show the impact of the supply chain volatility in September and October. 

At its heart, portfolio management involves managing risk. Random shocks often occur, affecting groups of companies that share the same business risks. For example, Technology companies, which can be found in many different sectors, sharply sold off at the start of this week (10.4.21). The sell-off was led by Interactive Media & Services (-3.08%), Semiconductors (-2.76%), Software (-2.29%) and Hardware (-2.22%), while the market was down 1.30% and the average stock down only 0.63%. With technology companies spanning several sectors and trading as a thematic group, we question whether investors are aware of their total exposure to the technology theme. 

2020 saw a boom in US IPOs, with record numbers in Healthcare and Technology, though a conspicuous absence in Energy. The attached report uses Syntax's unique Affinity™ data to provide a deeper understanding of the key trends driving this surge in IPO activity.

One year on from the trough, equity markets have rallied to new highs and the Stratified LargeCap Index is up 89.8%, outperforming the S&P 500 by 12%. With the rally looking long in the tooth and market multiples remaining close to March 2000 highs, we believe a rotation is just getting started as investors seek diversification and valuation opportunities away from cap-weighted products.

Today, cap-weighted indices like the S&P 500 are more biased and concentrated towards mega cap technology stocks than they were in March 2000. Unlike the DotCom bubble, the risk this time may not be a tech collapse, but that the rest of the market is undervalued and underrepresented in investors’ portfolios. Stratified Weight indices are designed to allocate more equally to sectors and industries to better capture the broad equity risk premium.

Following several years of underperformance, investors are showing a renewed interest for small cap stocks. The S&P SmallCap 600 index rose 31.3% in Q4 2020, outperforming the S&P 500 by 19.2%. The Syntax Stratified SmallCap Index showed even stronger performance, rising 32.0%. 
The strong performance could signal an investor preference for the growth potential of small cap companies, coupled with their reasonable valuations, especially relative to their large cap counterparts.

S&P 500 has worst performance day versus Stratified Weight as vaccines news pushes markets higher in the face of rising Coronavirus infections

Thematic investing involves building portfolios in order to capitalize on secular trends. Rather than investing in a single sector, such as financials, thematic investing offers focused exposure to a strategic opportunity that can cut across several different sectors. Learn how Syntax's Affinity data can construct precisely targeted thematic investments.

Climate change is an increasingly critical area of interest for investors, but many of the popular ex-fossil fuel funds on the market miss out on significant sources of fossil fuel risk. In this video, Maggie Bolas talks about how Syntax's Affinity data can create comprehensive fossil fuel screens and build targeted clean energy portfolios.

Syntax Creates New ESG Index that Aims to Improve Portfolio Outcomes.

Just like everyone knows that we need to wear masks to stay safe, everyone knows that diversification and valuation are important considerations when constructing investment portfolios. But a “safety in numbers”, herd mentality has driven everyone into the same securities and investors are currently buying Amazon stock with the same intensity that they bought Clorox wipes from the Amazon website in April.

The risk reduction benefits of diversification are well understood by investors and form the cornerstone of risk management. This paper shows that diversification can also improve upside capture and lead to higher portfolio returns. 

As the market leadership shifts from mega-cap technology stocks to a more value oriented focus, we wanted to highlight the attractiveness of our Stratified Weight Indices. So far this quarter, our flagship indices have significantly outperformed their benchmarks in all categories (US Large Caps, Mid Caps, Small Caps and International).

In 2019, there were a total of 129 Initial Public Offerings (IPOs) in the United States. By number of IPOs, the Healthcare sector dominated, representing 48.8% of the 2019 IPOs. The next largest sector by number of IPOs, Financials, represented only 15.5%. The concentrations of IPOs in the Healthcare and Financials sectors represent a heavy weighting in certain business risks of new stock into the economy, however it does not tell the full story. While the Healthcare sector accounted for a significant plurality of IPOs in 2019, the Information sector took in a much greater share of the total market capitalization, with just over $104.9B. That is, 48.8% of the value of newly listed public companies came from the Information sector. This massive amount of funding is made all the more interesting due to the fact that there were only fifteen Information sector IPOs.

The root cause of the current market crisis is markedly different from anything we’ve seen before. However, the broad risk aversion, chaotic markets and divergence of sector performance has many of the hallmarks of the 2008 Global Financial Crisis. In this report, we examine the trajectory of the 2008 sell-off and subsequent recovery using our unique business risk lens and give actionable insights. If the 2008/9 hindsight is indeed 20:20, there are two ways to add value to our core portfolios: (i) rebalancing after the broad-based sell-off and (ii) reducing business risk concentrations during periods of high uncertainty. We will explore these two strategies in more detail and take stock of the market today. 

Since the first cases of Coronavirus were publicly identified in Wuhan at the end of 2019, the market has experienced significant decline as investors face uncertainty about the outbreak’s effects on corporate earnings. Using Syntax’s Functional Information System (FIS®) to evaluate shared business risks, we can granularly understand how the virus has specifically impacted the Tourism industry and the broader market. 

When investors think about diversification, they are usually looking to reduce downside volatility. However, a more diversified approach can be just as helpful in enhancing returns during a market recovery. The S&P 500 Financials Sector has given investors a turbulent ride over the last decade. Since that index peaked on February 20, 2007, it has had an incredibly sluggish recovery. Just yesterday, almost thirteen years after the last peak, the index achieved a new all-time high. The Stratified LargeCap Financials Index, on the other hand, recovered from the financial crisis five years ago.

Building on the concept of active share, Syntax has developed a new measure of portfolio risk called Active Business Risk. This white paper introduces Active Business Risk as the excess level of sector or industry exposure in a portfolio or index and shows that Active Business Risk is an important driver of portfolio return. It concludes that Active Business Risk is a quantifiable risk that is not adequately diversified by cap weighted indices. 

On September 28, 2018, S&P Dow Jones Indices and MSCI Inc. implemented the largest structural change to the Global Industry Classification Standard to date, significantly broadening the GICS Telecommunication Services sector to include a host of new companies and renaming it the Communication Services Sector. In this report, we discuss the new GICS changes through the lens of the Syntax Business Risk Taxonomy. 

This report analyzes business risk exposures present in the S&P 500 over the previous 25 years using Syntax’s Functional Information System (FIS). Unlike traditional industry classification systems, which offer a one-dimensional, static, taxonomical approach to classification, FIS utilizes a multi-dimensional attribute classification system to better understand underlying risk exposures in investment portfolios.