Syntax Advisors has launched its first exchange-traded fund, the Syntax Stratified LargeCap ETF, on NYSE Arca Exchange under the Ticker SSPY).
Syntax’s Stratified LargeCap ETF seeks to track Syntax’s Stratified LargeCap Index, a Stratified Weight version of the S&P 500, calculated by S&P Dow Jones Indices and maintained by Syntax LLC, Syntax Advisors’ parent company. The ETF started trading on 4 January from an existing private fund vehicle, thereby launching with four years of live performance history.
“The breakthrough of the Stratified LargeCap ETF is that an investor can now own a passively managed portfolio of the same companies as the S&P500 but using a weighting methodology designed to maintain diversified exposures to related business risks. This is a first in a low-cost, passively managed ETF,” says Founder and CEO Rory Riggs.
“We built the Stratified LargeCap strategy to provide an alternative to the capitalisation weighting methodology used by the major indices which concentrates portfolio risk in the largest, most momentum-driven names” adds Riggs. “For example, the top 10 names in the S&P 500 made up approximately 21 per cent of the index at year-end 2018; not surprisingly, most of these were well-known technology companies. Rather than heavily weight to the largest companies and momentum-driven sectors, our goal is to capture a diversified market return representative of the entire business universe included in the S&P 500.”
The Syntax Stratified LargeCap ETF holds the exact same companies as the S&P 500, but weights those companies using Syntax’s patented Stratified Weight methodology, which diversifies the related business risks that frequently occur in major market indices like the S&P 500. The cap weighting used by these traditional indices causes large companies with related businesses to exert a disproportionate impact relative to the other types of businesses held by the index. Related business risks are not based on companies’ capitalisation or past performance, but rather, are based on each company’s current business functions and the functional economic relationships between them. The Index uses technology that makes it possible to control for risks shared by groups of related companies by: 1) organising companies that share related business risks into well-defined functional groups; and 2) weighting these groups to spread exposure across these underlying risks.
“We built a new classification system that lets us identify and map related business risk. Syntax believes that managing business risks should be an essential part of any investor’s risk strategy. Companies with similar business characteristics (ie same products, customers, suppliers, regulatory environment, and others) should react similarly when shocks hit the equity markets,” says Riggs. “The key to risk management is to maintain a diversified exposure to related business risk.”
Recent market volatility highlights the potential dangers posed by the over-concentration of related business risk in cap-weighting. Currently, the S&P 500 has outsized exposure to technology business risk: as of 31 December 2018, the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) represented 11.4 per cent of the S&P 500 weight and 14.4 per cent of its total volatility. By controlling for these overexposures, the SSPY ETF seeks to maintain a balanced exposure to the underlying related business risks. In contrast to the S&P 500 index, the FAANG stocks were 0.8 per cent of the Stratified LargeCap Index and 1.0 per cent of the volatility.
“As someone who was a part of developing the very first exchange-traded vehicle, the SPDR® S&P 500 ETF, back in 1993, I am excited to launch a new product that provides investors with the same S&P 500 constituents in a more diversified way,” says Kathy Cuocolo, President of Syntax Advisors. “The Stratified Weight methodology has the opportunity to radically disrupt index-investing.”
In the development and distribution of SSPY, Syntax Advisors is pleased to be working with the leading professionals in the ETF ecosystem, including State Street, Foreside Fund Services, NYSE Arca, and Cantor Fitzgerald as Lead Market Maker.
“We are pleased to be involved in the launching of a uniquely designed equity market index. We have high hopes for our partnership,” says Reggie Browne, Senior Managing Director – ETF Group at Cantor Fitzgerald.
The Syntax Stratified LargeCap Index is a product of Syntax Indices, a division of Syntax, LLC. The Syntax LargeCap ETF (Ticker: SSPY) is the first ETF to track a Stratified-Weight Index.