Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 02/05/16. Rates and Economic Calendar Data from Bloomberg as of 02/08/16.
Following two consecutive weekly gains in U.S. stock market indexes, most major benchmarks turned lower last week with the S&P 500 Index (S&P 500) falling over 3%, the Dow Jones Industrial Average (DOW) dropping over 1.5% and the NASDAQ moving 5.3% lower. The technology heavy NASDAQ , after outperforming the S&P 500 Index in 2015 by over 8%, is now in “correction” territory after having lost close to 13% thus far in 2016 alone. Furthermore, the NASDAQ is now down over 16% from its all-time high of 5,218 reached on July 20, 2015.
While news outlets display the returns of these three indices on the bottom of the TV or computer screen next to one another, they should not be treated as equals. There are important distinctions between these benchmarks that should be considered before attempting to use one as a potential performance measure for your own investment portfolio. Much time can be spent discussing their many differences but the broadest distinction that should be made is the allocation each has to the ten different sectors that are used to classify U.S. Businesses. Consider the table below:
From this table, one can reasonably conclude that the S&P 500 Index is the most diversified index with exposure to all ten sectors and the most concentrated sector position being the 19% allocation to technology companies. The Dow Jones Industrial Average, while only consisting of 30 stocks compared to the 500 stock in the S&P 500 Index, is also fairly well diversified across business lines with nine sectors being represented and the highest allocations of 19% each belonging to both Financial Services and Industrials. The NASDAQ by contrast has a significant 54% weighting in technology companies while basic materials, energy, and utility providers are noticeably absent.
Considering the different sector exposures each index has, it should not come as a surprise that historically they have exhibited different levels of risk and return. Recent history, however, shows comparable levels of risk across these benchmarks and investors who only focus on 3 or 5 year historical data may only be looking at part of the picture. The bar chart below shows how the level of risk ( as measured by standard deviation) of each index has been kept low during this current secular bull market, but is more elevated when looking out 10 and 15 years.
This highlights the need to understand not only what you measure your portfolio against but also how important asset allocation can be when selecting investments.
Important Information and Disclaimers
Disclosures: Hennion & Walsh is the sponsor of SmartTrust® Unit Investment Trusts (UITs). For more information on SmartTrust® UITs, please visit www.smarttrustuit.com. The overview above is for informational purposes and is not an offer to sell or a solicitation of an offer to buy any SmartTrust® UITs. Investors should consider the Trust’s investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information relevant to an investment in the Trust and investors should read the prospectus carefully before they invest.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.