Tag Archives: S&P 500 Index

Sector Watch: Low-Beta Stocks

Financial theory suggests that risk and return go hand-in-hand:

Small company stocks tend to be riskier and outperform large company stocks. Long-term bonds tend to be riskier and outperform short-term bonds. Corporate bonds tend to be riskier than Treasury bonds (with comparable terms) and outperform Treasuries over time.

However, there is one group of stocks that has consistently defied this risk/return relationship: Low-beta stocks. A low-beta strategy involves selecting stocks that have a lower-than-average beta value. (Beta is a measure of the stocks’ volatility and adding low-beta stocks to your portfolio can help investors build a diversified portfolio.) The good news for investors here is that Continue reading

Beyond VIX: The Outlook for Market Risk

A couple of notable statistics pertaining to current market conditions are VIX and implied volatility numbers for the S&P 500 and other major market indexes.  For those who are not familiar with these measures, they are ways to quantify risk.  Implied volatility is the market’s consensus view of risk.  VIX is an index that tracks very near-term implied volatility.  There is a great deal that we can see in the market by looking at these numbers.

The trailing 3-month volatility of SPY (an S&P 500 ETF) is below 12% and VIX is at 16.3 (16.3%) as I write this.  The trailing 1-year volatility for SPY is 22.7%.  Market volatility in the last several months has been very low.

Now let’s look forward.

There are several major market indexes that are worth watching.  Continue reading

Q3 2011: Another Test for 2010 Target Date Funds

The third quarter of 2011 was impressively bad.  The S&P 500 Index lost 13.9% for the quarter.  The VIX, the standard measure of market volatility, repeatedly closed above 40 during this quarter. To put this in perspective, the average daily closing value of VIX from the start of 1990 through the end of September 2011 was 20.5. The average daily closing value for VIX during Q3 of 2011 was 30.6. 

Many critics of Target Date funds felt that these funds lost too much during the bear market in 2008. Special attention was focused on 2010 Target Date funds, funds designed for investors planning to retire in 2010. The poor performance of these funds even got the attention of the SEC, which proposed new disclosure standards. Market observers (including the SEC) noted that 2010 Target Date mutual funds lost an average of 24% in 2008. In light of 2008, many funds redesigned their asset allocations to be more resistant to massive market declines. 

Now, let’s flash forward three years. Continue reading

Long Live Diversification!

I get tired of all of the articles saying that the old standards of buy and hold and diversification are dead. Every time the market takes a dive or things get volatile, I hear the same refrain:

Buy and hold is dead.
Diversification is an easy way to lose.
Diversification is for idiots.

What I want to know is: Where’s the evidence? Continue reading

The Hidden Costs of Index Funds

While it is widely understood that index funds represent a low-cost way for investors to achieve broad diversification, a recently published research study sheds light on a “hidden cost” associated with investing in index funds.

Antti Petajisto, a professor at NYU’s Stern School of Business, conducted the original research for “The Index Premium and its Hidden Cost for Index Funds,” as part of his Ph.D. thesis at Yale in 2003.

The study examines the ways that stock prices change between the time that it is announced that a company will be added or removed from a stock index (such as the S&P500) and when the company’s stock is actually added.  The research suggests that canny institutional investors can make a profit in this period that results in a drag on performance for index fund investors.

Continue reading

Do Performance Claims Really Add Up?

Jason Zweig, well-known author of “The Intelligent Investor” column at The Wall Street Journal, recently checked out the claims of market-beating performance in marketing materials from a range of market commentators.

For example, Jim Cramer’s newsletter was reported by Zweig as stating that his stock picks generated returns more than twice the performance of the S&P 500 Index from Jan 1, 2002 to April 1, 2011. Over this period, the newsletter described Mr. Cramer’s performance as generating 39.2% vs.15.5% for the S&P 500.

Mr. Zweig noticed, however, that in Mr. Cramer’s performance comparison, the returns cited for his stock picks included dividends, while the returns cited for the S&P 500 Index (over the same period) did not. Continue reading