Syntax Index Insights: Fourth Quarter 2020

  • Stratified Indices continue their strong performance in Q4
  • Sector Reversal. The value trade builds momentum
  • Thematic Exposure: Inflation in focus
  • Dollar Weakness: S&P 500 more exposed to foreign revenues than Stratified LargeCap

Stratified Indices continue strong performance in Q4 

Equity markets continued to perform well in the fourth quarter of 2020, with the S&P 500 rising 12.15% to finish the full year up 18.40%. This return masks the economic destruction caused by the Coronavirus pandemic.

Stratified Weight Indices outperformed across all US size categories (small, mid and large) in the fourth quarter, with the Stratified LargeCap Index outperforming the flagship S&P 500 by 5.76%. The Stratified MidCap and Stratified SmallCap Indices continued their strong performance in Q4 (up 26.20% and 31.96% respectively), and for the full year outperformed the S&P MidCap 400 and S&P SmallCap 600 by 4.12% and 14.10% respectively. The Stratified Europe & Asia Developed Markets (SEADM) Index finished the year up 8.32%, in line with MSCI EAFE (see Exhibit 1).

Exhibit 1. Core Index Comparison: Stratified, Cap, and Equal Weight
Source: Syntax, S&P Dow Jones Indices, MSCI. Total return performance does not reflect fees or implementation costs as an investor cannot directly invest in an index. Year-to-date covers period from 1.1.2020 to 12.31.2020. * Syntax Europe & Asia Developed Markets Index, based on the MSCI EAFE universe.


Despite surging infections, the raft of good news regarding successful trials of several COVID-19 vaccines sparked a movement towards risky assets in November, as investors favored companies that were derated the most in Q1 2020 (Tourism, Energy and Corporate Real Estate stocks) over the high-flying Technology companies that carried the market in Q2 and Q3. 

Due to its larger exposure to these mean-reverting segments, the Stratified LargeCap Index delivered significantly higher returns in each month in Q4, outperforming the S&P 500 in October’s sell-off as well as during November’s strong rebound (Exhibit 2).

Exhibit 2. Q4 2020 Performance, month-by-month
Source: Syntax, S&P Dow Jones Indices. Total return performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.


Sector Reversal. The Value Trade Builds Momentum

The rotation into Energy and Financials, the two best performing sectors in the S&P 500 in Q4, was a continuation of the reversal trade that has seen the worst performing sectors during the Q1 sell-off become the best performing sectors (Exhibit 3).

Exhibit 3. Performance reversal in Q4
Source: Syntax, FactSet. Total return performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.


This reversal trade, largely spurred by optimism of a successful vaccine roll-out and a return to a pre-COVID environment, parallels the sector reversals seen from March 2009 following the Financial Crisis (see “Sell-offs, Reversals and Business Risk”).

Though much of the March 2020 sell-off has now recovered, there are reasons to believe that the reversal can continue from here. Financials and Energy were the worst performers in 2020 and offer attractive valuations relative to the rest of the market. 

At the same time, if value stocks continue to outperform, they will eventually be included in trend following strategies and would benefit from inflows into the associated portfolios. Furthermore, as the new administration sets its sights on corporate tax reform and regulation, the outlook for tech seems increasingly uncertain.

Stratified Weight Indices typically carry more Small Cap and Value exposure than cap-weighted indices. As of the end of 2020, the Stratified LargeCap index is trading at a 27.5% Price / Book discount to the S&P 500 (2.9x vs 4.0x respectively). The two indices had traded at a comparable multiple at the start of 2017 and then separated as the weight of high-multiple technology stocks gradually increased.

Exhibit 4. Price/Book Ratio: Stratified LargeCap vs. S&P 500
Source: Syntax, Bloomberg.


Thematic Exposure: Inflation and Real Assets

Inflation expectations have risen a full percentage point since the US elections on November 3rd (as measured by the 2-year breakeven rate, Exhibit 5) and inflation sensitive segments of the market have performed strongly. 

Exhibit 5. Inflation on the rise
Source: Syntax, Bloomberg.


The Syntax Real Asset Index is a Stratified Weight equity index of developed markets companies that have substantial physical or tangible asset exposure, including real estate, timberland, commodity reserves, and infrastructure. The index is calculated by NYSE and designed to offer liquid equity exposure to traditional real asset companies and serve as an effective hedge against inflation and commodity supply shocks. 

In Q4 2020, the Syntax Real Asset Index returned 24.6%, significantly outperforming the S&P Real Assets Equity Index and the broader market (Exhibit 6).

Exhibit 6. Performance of Real Asset Index
Source: Syntax, S&P Dow Jones Indices.


Dollar Weakness: S&P 500 more exposed to foreign revenues than Stratified LargeCap

Coinciding with a dramatic increase of the Federal Reserve’s balance sheet from $4.2tn to $7.3tn in 2020, the US Dollar (DXY) weakened over 10% for the year.

Given that currency movements can significantly affect the bottom line of companies who derive a meaningful amount of their revenues abroad, it is useful for investors to understand the geographical exposure of their portfolios from a revenue perspective. Companies with high international revenues could benefit from a weaker dollar, especially if their cost-base is predominantly in US dollars.

Syntax’s Affinity™ analysis platform allows users to breakdown their portfolios into regional and country exposure. For example, the S&P 500 has many companies with greater than 75% of their revenues derived internationally (Exhibit 7). 

Exhibit 7. % non-US Revenue
Source: Syntax Affinity™


The weight of each company in the portfolio will therefore have an impact on the strategy’s overall geographic revenues and consequentially its indirect currency exposures.

The S&P 500 derives at least 24% of its revenues abroad, so should have a higher sensitivity to the US Dollar than the Stratified LargeCap Index, which has more of a domestic focus, earning at least 18% of its revenues internationally (Exhibit 8).

Exhibit 8. Aggregate Geographic Revenue Exposure
Source: Syntax Affinity™. Weights may not sum to 100% due to rounding.


Sector and Composite Performance 

US LargeCap (S&P 500 universe)
Source: Syntax. Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.


US MidCap (S&P MidCap 400 universe)
Source: Syntax. Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.


US SmallCap (S&P SmallCap 600 universe)
Source: Syntax. Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.


International Developed (MSCI EAFE universe)
Source: Syntax. Performance does not reflect fees or implementation costs as an investor cannot directly invest in an index.


Important Disclaimers

This document is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon for, legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. In addition, certain information contained in this factsheet has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used in this factsheet, such information has not been independently verified by Syntax and Syntax does not assume any responsibility for the accuracy or completeness of such information. Syntax LLC, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

Past performance is no guarantee of future results. The inception date of the Syntax Stratified LargeCap and Syntax Stratified MidCap Indices was December 27, 2016. The inception date of the Syntax Stratified SmallCap Index was January 3, 2020. The inception date of the Syntax Europe & Asia Developed Markets (“SEADM”) Index was January 1, 2016. The inception date of the Syntax Real Asset Index was July 1, 2015. Charts and graphs are provided for illustrative purposes only. 

Index performance does not represent actual fund or portfolio performance and such performance does not reflect the actual investment experience of any investor. An investor cannot invest directly in an index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in a portfolio invested in accordance with an index. None of the Syntax Indices or the benchmark indices portrayed herein charge management fees or incur brokerage expenses, and no such fees or expenses were deducted from the performance shown; provided, however that the returns of any investment portfolio invested in accordance with such indices would be net of such fees and expenses. Additionally, none of such indices lend securities, and no revenues from securities lending were added to the performance shown.  

The Syntax Stratified LargeCap Index, Syntax Stratified MidCap Index, Syntax Stratified SmallCap Index, SEADM Index are the property of Syntax, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Indices. The Indices are not sponsored by S&P Dow Jones Indices or its affiliates or its third party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omissions in calculating the Index. “Calculated by S&P Dow Jones Indices” and the related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Syntax, LLC. S&P® is a registered trademark of Standard & Poor's Financial Services LLC (“SPFS"), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The MSCI EAFE Index was used by Syntax, LLC as the reference universe for selection of the companies included in the SEADM Index. MSCI does not in any way sponsor, support, promote or endorse the Index. MSCI was not and is not involved in any way in the creation, calculation, maintenance or review of the Index. The MSCI EAFE Index was provided on an “as is” basis. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating the MSCI EAFE Index (collectively, the “MSCI Parties”) expressly disclaim all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non‐infringement, merchantability and fitness for a particular purpose). Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages in connection with the MSCI EAFE Index or the SEADM Index. Prior to March 19, 2018, the SEADM Index was calculate by NYSE. Sector subsets of the Syntax Stratified LargeCap, Syntax Stratified MidCap, and SEADM Indices are calculated using model performance generated in FactSet, and as such may differ from index calculations performed by S&P Dow Jones Indices. The Syntax Real Asset Index is the property of Syntax, LLC, which has contracted with NYSE to calculate and maintain the Indices. The Index is not sponsored by NYSE or its affiliates or its third party licensors. Prior to August 2, 2017, the Index was calculated by Indxx. Syntax®, Stratified®, Stratified Indices®, Stratified-Weight™, Stratified Benchmark Indices™, Stratified Sector Indices™, Stratified Thematic Indices™, Affinity™, and Locus® are trademarks or registered trademarks of Syntax, LLC and its affiliate Locus LP. 

The S&P 500® Index is an unmanaged index considered representative of the US mid- and large-cap stock market. The MSCI EAFE Index is an unmanaged index considered representative of the European, Australian, and East Asian large-cap stock market. Benchmark data for the S&P 500, S&P 500 Equal Weight, S&P MidCap 400, S&P MidCap 400 Equal Weight, S&P SmallCap 600, S&P SmallCap 600 Equal Weight, and S&P Real Assets Equity Indices are provided by S&P Dow Jones through FactSet®. Benchmark data for the MSCI EAFE index is provided by MSCI through FactSet.